MeatyREADS

You Put Your Left Foot in, You Take Your Left Foot Out…

September 27, 2008 – 3:37 pm by BH

Ben S. Bernanke jumped into the political fray this week when he urged quick action from Congress to deal with “grave threats” to the financial system. Now he’s trying to jump back out.

The Federal Reserve chairman hasn’t returned to Capitol Hill after two days of congressional testimony earlier this week. He has made it clear to Treasury officials and lawmakers that he isn’t taking part in negotiating details of a $700 billion proposal to rescue the financial system even as the plan runs into a political buzzsaw.

By letting Treasury Secretary Henry Paulson be the point man with Congress, Bernanke may be trying to restore the Fed’s position as a neutral party in Washington and preserve the central bank’s independence. That’s after he put both on the line by endorsing Paulson’s plan and using the Fed’s balance sheet to rescue creditors of Bear Stearns Cos. and American International Group Inc.

Via Bloomberg. My hunch is that the Fed Chairman was resistent to the idea of doing the bailout, which explains his careful moves all year (see macroblog). Lehman was a test. When it went down I think it became clear that something on the order of our current proposal was necessary. Treasury has spent the last 9 months running through different scenarios of what might happen and apparently they’ve settled on a reverse auction, despite some reservations from a few economists. I think Bernanke signed off, at least in a general way, because he felt something had to be done now and this was probably the best they could hope for in a political environment.

This last part was flattering:

“Bernanke’s been a total straight shooter on this,” Senator Sherrod Brown, an Ohio Democrat who sits on the Banking Committee, said in an interview at the Capitol. “People trust him. He doesn’t have the Wall Street bias that Paulson has. And he doesn’t have the Bush administration coloring, if you will, that others have.”