Mired in politics, Bernanke tries to steer Fed

Shortly after the Fed in March took the unprecedented step of helping to bankroll JPMorgan Chase's takeover of investment house Bear Stearns, Bernanke told Congress it was meant as a one-time event. "It has never happened before, and I hope it never happens again," he said.

At the time it took the Bear Stearns action, the Fed also opened its emergency lending program to investment firms, fearing they could all go down. (One by one the remaining firms did disappear — either filing for bankruptcy, merging or converting themselves into banks.)

Just six months after the Bear Stearns debacle, the Fed ended up endorsing the government's historic seizure of mortgage titans Fannie Mae and Freddie Mac, providing a staggering $85 billion loan to insurance giant American International Group and helping Paulson hatch the massive financial bailout package.

The bailout plan was intended to thaw frozen credit markets by buying billions upon billions of rotten mortgage-related assets held by banks and other financial institutions so that they would lend money more freely again. Congressional leaders raced Tuesday to find out what changes are needed to sell the failed package to rank-and-file members.

In the fall of 2005, Bernanke, then Bush's chief economic adviser, pledged to run the Fed independent of political influences during a Senate hearing on his nomination after Alan Greenspan retired.

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"I assure this committee that, if I am confirmed, I will be strictly independent of all political influences and will be guided solely by the Federal Reserve's mandate from Congress and by the public interest," Bernanke told the Senate Banking Committee at that time.

Bernanke also suggested to lawmakers that he wanted to steer clear of weighing in on specific hot-button legislative proposals, such as those dealing with taxes and spending. "I'm going to begin now, I think, a practice of not making recommendations on specific tax or spending proposals," he told lawmakers during the confirmation process. That stood in sharp contrast to Greenspan, whose support of President Bush's call for massive tax cuts in 2001 infuriated many Democrats.

These days critics — including academics, lawmakers and economists — worry that the Fed's expanded role during the crisis is not only putting taxpayers at risk but also encourages "moral hazard" — that is, allowing financial companies to gamble more recklessly in the future.

At a Fed conference in August, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, gave Bernanke a white hard hat — like those worn by construction workers — in case he needed protection from critics during the sessions.

One of those critics, Willem Buiter, professor of European political economy at the London School of Economics and Political Science, complained that the Fed listens too much to Wall Street.

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