Conference to be referendum on Bernanke, Fed

updated 9:51 a.m. ET Aug. 22, 2008

WASHINGTON - Thrust into the role of financial firefighter, Federal Reserve Chairman Ben Bernanke has taken unprecedented steps over the past year to battle the nation’s worst credit and financial crises in decades.

For many, the verdict is still out on if he opened up the hoses too widely.

While intended to prevent a broader economic meltdown, the Fed’s actions have drawn some criticism on Capitol Hill and elsewhere about whether taxpayers are being put at risk and if expanded safety nets will encourage financial companies to gamble more recklessly in the future.

Bernanke tackles financial stability in a key speech at 10 a.m. EST Friday at a high-profile conference. The Fed’s handling of the credit, financial and housing debacles — which have badly burned the economy — is likely to spur debate at the event in Jackson Hole, Wyo. This year’s forum will examine past and present financial crises, and the challenges confronting Bernanke and other central bankers as they try to help stabilize financial markets worldwide.

Sponsored by the Federal Reserve Bank of Kansas City, the three-day conference opens Thursday with a reception for Fed policymakers, economists, academics and international central bank officials. The main attraction — a speech by Bernanke on financial stability — comes Friday morning, followed by a raft of academic papers and discussions.

At last year’s conference, Bernanke was taking heat about whether to start lowering interest rates. He signaled the Fed stood ready to do so. It cut rates seven times from September through April.

The economy is the top concern for voters and of keen interest to presidential contenders Sens. Barack Obama and John McCain, who are gearing up for their party’s conventions. Financial and credit problems are expected to smolder into next year.

The International Monetary Fund has described the financial shock as the biggest “since the Great Depression.” But Bernanke — a scholar of the Depression — has said while the current experience is not “remotely like” that, the ongoing financial distress in the U.S. is among “the most severe episodes of the post War era.”

The roots of the current crisis can be traced to lax lending for home mortgages — especially subprime loans given to borrowers with tarnished credit — during the housing boom. Lenders and borrowers were counting on home prices to keep zooming. But when the housing market went bust, home prices plummeted. Foreclosures spiked as people were left owing more on their mortgage than their home was worth. Rising mortgage rates also clobbered some homeowners.

“As we look back on it, we see that there were just some serious failures in the management of risks,” Bernanke told Congress last month. “The regulators bear some responsibility on that.”

As financial companies racked up multibillion-dollar losses on soured mortgage investments, and credit problems spread globally, firms hoarded cash and clamped down on lending. That crimped consumer and business spending, dragging down the national economy — a vicious cycle the Fed has been trying to break.

To brace the wobbly economy, the Fed has slashed its key interest rate by a whopping 3.25 percentage points, the most aggressive rate-cutting campaign in decades. Yet, those cuts also aggravated inflation.

The Fed has taken a number of unconventional — and some controversial — actions to shore up the shaky financial system and to get credit — the economy’s lifeblood — flowing more freely.

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