Bernanke may be feeling some heat

Fed's actions on seminar agenda

WASHINGTON - Thrust into the role of financial firefighter, Federal Reserve chairman Ben Bernanke has taken unprecedented steps to battle the nation's worst 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 about whether taxpayers are being put at risk and if expanded safety nets will encourage financial companies to gamble more recklessly in the future.

The Fed's handling of the credit, financial, and housing debacles is likely to spur debate at a conference in Jackson Hole, Wyo. Sponsored by the Federal Reserve Bank of Kansas City, the conference opens today. The main attraction - a speech by Bernanke on financial stability - comes tomorrow.

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 distress is among "the most severe episodes of the postwar era."

The roots of the current crisis can be traced to lax lending for home mortgages during the housing boom.

"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 economy.

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

The Fed has also taken a number of unconventional actions to shore up the shaky financial system.

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. In July, the Fed said mortgage giants Fannie Mae and Freddie Mac also could tap the program.

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 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.

Worried about inflation, the Fed has halted rate cuts. The Fed is expected to leave rates at the current 2 percent when it meets Sept. 16. 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.