Before he took over the Federal Reserve, Ben Bernanke told Congress he wanted to steer clear of politics.
More than two years later, he's knee deep in political mud as the Bush administration scrambles to breathe new life into the financial bailout package.
In a series of high-stakes sessions over the past several weeks, Bernanke and Treasury Secretary Henry Paulson have sought to sell the $700 billion rescue package to skeptical lawmakers.
The worst financial crisis since the Great Depression has thrust Bernanke squarely into the political arena — championing in public appearances before TV cameras and closed-door meetings on Capitol Hill the unprecedented bailout.
Bernanke's journey underscores the grave economic situation. The conundrum confronting Bernanke: How far can you go in trying to save the economy, while at the same time not hurting the Fed's independence?
“There is a very serious risk that the Fed compromises its independence with these moves, but I think the alternative is calamity,” said Richard Yamarone, economist at Argus Research.
A sober-faced Bernanke, a scholar of the Great Depression who grew up in Dillon, S.C., told hostile lawmakers last week he wished the Fed — the lender of last resort — didn't have to be so deeply involved. “The Federal Reserve would like to get out of dealing with some of these crises we've been dealing with … and we prefer to get back to monetary policy, which is our function, our key mission.”
The credit crisis has forced Bernanke — who has been running the central bank since February 2006 — to take actions he wanted to avoid.
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.
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.
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.
“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.
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.