Analysis: Fed Bearing Brunt of Blame

April 4, 2008 at 9:32 am | Posted in economy USA, finance | Leave a comment
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WASHINGTON (AP) — While Treasury Secretary Henry Paulson and some lawmakers want to give the Federal Reserve broader powers to head off financial disasters, the Fed’s easy-money policies earlier this decade and years of homeownership incentives dangled by the White House and Congress helped set the stage for today’s housing and credit crises.

Housing markets might not have gotten so overheated if the central bank under Alan Greenspan hadn’t kept interest rates so low for so long. And Congress — aided by both Democratic and Republicans administrations — helped to inflate the housing bubble by loosening financial regulation and enacting policies to promote and reward home ownership.

Fed Chairman Ben Bernanke got mostly praise on Capitol Hill this week for his bold and unorthodox steps last month: engineering the takeover of Wall Street’s Bear Stearns by J.P. Morgan Chase, offering to lend hundreds of billions of dollars to investment banks and an aggressive three-quarter percentage point interest rate cut.

But in two days of questioning by congressional panels, Bernanke and other financial regulators drew pointed questions about the Fed’s putting U.S. taxpayers at risk for up to $29 billion in the Bear Stearns loan.

“Was this a justified response to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout, as some have called it, while people on Main Street struggle to pay their mortgages?” Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Thursday.

That question still lingers, despite Bernanke’s answer that it helped avert a looming financial catastrophe, that the Fed doesn’t directly oversee home ownership issues — a problem he suggested Congress tackle — and that he did not anticipate losing any taxpayer money on the Bear Stearns deal.

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