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How Bernanke Staged a Revolution

By invoking emergency powers, Ben Bernanke has drawn criticism. He has transcended usual limits on the central bank and stretched its legal authority, committing vast sums of taxpayer dollars.
By invoking emergency powers, Ben Bernanke has drawn criticism. He has transcended usual limits on the central bank and stretched its legal authority, committing vast sums of taxpayer dollars. (By Kevin Clark -- The Washington Post)
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"For many months, the chairman was asking 'how can we escalate?' " said William C. Dudley, president of the New York Fed. "There was a general consensus that we were getting to the point where traditional monetary policy tools might not be sufficient."

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Into the Mortgage Market

The decision to flood money into the mortgage market was not Bernanke's alone; the power to do so belonged to the Federal Open Market Committee, which he leads. The four other governors serve on it, as does a rotating group of five of the 12 presidents of regional Fed banks.

In November, Bernanke called individual committee members to see whether they would be open to the Fed inserting itself into the mortgage market.

At the time, some committee members viewed the purchase of mortgage securities as a way to lower mortgage rates, encourage home sales and thus find a bottom for the housing market. Others said that buyers were irrationally avoiding even safe mortgage assets and that the Fed needed to act to make the markets to function more normally. Still others wanted the Fed to boost confidence in Fannie Mae and Freddie Mac by making more explicit the idea that the U.S. government stood behind the mortgage finance giants.

There were worries, too, that buying mortgage-related securities could make it hard for the Fed to suck money out of the economy once it began to recover, which could lead to inflation, or that doing so could put the government in the role of favoring housing over other sectors.

Bernanke guided the group toward a conclusion. Even though members had differences, most agreed that the economy was in bad shape and that the Fed's purchase of mortgage debt would likely help matters.

"The chair of any committee can respond to comments that challenge his view in ways that essentially inform the committee that the issue isn't worth discussing. This chairman doesn't do that," said Jeffrey M. Lacker, president of the Richmond Fed, who worried that the Fed was putting itself in the uncomfortable position of allocating capital in the economy. "He takes other views seriously."

'Some Thoughts of My Own'

At the Federal Open Market Committee meetings, after reading from his notes that synthesize the views of participants around the table, he turns to a second sheet of paper. "Having heard that," he might say, "let me add some thoughts of my own."

In December, Bernanke came into the meeting looking to take steps to indicate to the world that the basic framework of policy had changed. Cut the interest rate the Fed controls to roughly zero, he argued. And lay out publicly the options the Fed could exercise to support the economy further, such as buying long-term Treasury bonds.

He also promised to involve the Fed leaders broadly in future decisions.

Given the Fed's peculiar structure, some decisions involving its emergency efforts to expand credit are made by the full FOMC while others are made by the Board of Governors in Washington. When the Fed decided to bail out Bear Stearns last spring and American International Group in the fall, presidents of regional Fed banks found out not long before the public did.

Bernanke essentially promised to engage senior officials across the Fed in that decision-making process, even in areas where they have no official say.

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