Economic Challenges Draw Out Divisions at Fed

Some former Fed officials have been even more outspoken in criticizing the intervention. William Poole, who was president of the St. Louis Fed until March, has said that the actions created an "appalling" situation, and Vincent Reinhart, who was a senior staff member until last summer, called it "the worst mistake in a generation." They argue that it set a precedent for government intervention that could have adverse consequences.

There are Fed staff members whose private views are similar to what Poole and Reinhart have said publicly, according to people in close contact with economists in the Federal Reserve system.

Bernanke and his inner circle view these concerns as valid and weighed them heavily in deciding whether to rescue Bear Stearns. But they have said that the price of not acting would have been a global financial catastrophe.

The current Fed system was established in 1913 when Congress, fearful of concentrating financial power in Washington or New York, created regional banks scattered around the country. These banks hold five of the 12 seats at any given time on the Federal Open Market Committee, which decides the nation's monetary policy.

Bernanke has welcomed the resulting debate. He even sees some usefulness in the dissenting votes on interest-rate policy, as these give financial markets a hint of where the committee might adjust its policy in the future.

Gerald Corrigan, the former president of the New York Fed and now a managing partner at Goldman Sachs, said, "One of the great strengths of the Fed policymaking process for as long as I've known it is that you get lots of views from many different perspectives."

Bernanke has set out to encourage more debate than did his predecessor Alan Greenspan. Greenspan spoke first at FOMC meetings, which could create subtle pressure for people to agree with his assessment of the economy and the proper course of action. Bernanke speaks last.

"By his nature and his capacity to appreciate different points of view, Ben would be expected to encourage people to bring different perspectives to the table," said Marvin Goodfriend, a Carnegie Mellon University economist who has known Bernanke for years.

Another difference is the economy itself.

"We had a lot of years in which there wasn't much to disagree about because conditions were very good," said Alice Rivlin, a senior fellow at the Brookings Institution and former Fed vice chairman. "Now we have a very complicated situation. It's not obvious what they should be doing. That's bound to generate more back and forth within the board."

When there were serious disagreements in the 1970s and '80s, they were mostly confined to the giant conference room on Constitution Avenue where the FOMC deliberates. Then, unlike now, the Fed did not immediately announce its rate actions and what the vote was. Presidents of regional banks gave fewer speeches and interviews with reporters. There was no CNBC doing round-the-clock analysis of every comment from Fed officials.

Former Fed leaders said intense debates over policy rarely spill over into personal interactions. Despite the intellectual tension, the FOMC members go to evening receptions where cordiality is the rule.

"If you put the Federal Reserve system on the chalkboard at Harvard Business School, the students would laugh you out of the room," Corrigan said. "But it works."