Conference to be referendum on Bernanke, Fed

In the broadest expansion of its lending powers since the 1930s, the Fed agreed in March to let investment houses draw emergency loans directly from the central bank. At the time, the Fed feared other investment banks could be in jeopardy after a run on Bear Stearns Cos. pushed it to the brink of bankruptcy. As part of JPMorgan Chase & Co.’s takeover of the failing company, the Fed provided a $28.82 billion loan.

In July, the Fed said troubled mortgage giants Fannie Mae and Freddie Mac also could tap the program. For years, such lending privileges were extended only to commercial banks, which are subject to stricter regulatory supervision. Fannie and Freddie’s problems continued this week as concerns over their capital-raising abilities and the prospect of a government bailout caused shares of both to plunge.

The Fed also gave banks another way to tap short-term loans and let investment firms swap risky investments for super-safe Treasury securities. Those programs aim to help squeezed financial companies overcome credit problems so they can keep lending to customers.

Some critics worry the Fed actions could put taxpayers on the hook for billions of dollars and create a “moral hazard,” where financial companies might feel more inclined to take extra risks in the future because they believe the Fed will ultimately bail them out.

Bernanke has repeatedly defended the Fed’s decisions saying they were needed to avert a financial catastrophe that could have plunged the economy into a deep recession. The Fed chief also has said he doubted taxpayers would suffer any losses.

The Fed “never lost a penny” in past lending maneuvers, Bernanke said.

Some economists and lawmakers blame former Fed Chairman Alan Greenspan for feeding the housing bubble that eventually burst by leaving rates at extraordinary low levels for too long. The Greenspan Fed in the summer of 2003 dropped its key rate to 1 percent, the lowest in more than four decades. The rate stayed there for a year before the Fed started raising rates to curb inflation.

Greenspan also has been criticized for failing to crack down on certain dubious lending practices that led to the explosion of risky subprime mortgages. Greenspan has said the benefit of expanded home ownership in the U.S. was worth the risk.

Bernanke, who took over the Fed in February 2006, pushed for tougher regulations in this area, which were adopted in July.

Worried about inflation, the Bernanke Fed has halted its rate-cutting campaign. The Fed is expected to leave rates at the current 2 percent, a four-year low, when it meets on Sept. 16 and probably through the rest of this year. But Richard Fisher, president of the Federal Reserve Bank of Dallas, wants to boost rates, fearing inflation could get out of hand.

If more Fed members join Fisher’s camp next month, Bernanke will find himself trying to douse more fires: a Fed fragmented over when to boost rates, and heightened concerns about inflation engulfing Wall Street and Main Street.

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