Analysis: Fed Bearing Brunt of Blame

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.

Still, he conceded the Fed's actions raised "difficult questions of public policy."

Panels in both the House and the Senate are taking an election-year look at revamping that policy, including the administration's restructuring plan outlined earlier this week by Paulson to give the Fed more authority to protect the stability of the entire financial system.

The Fed itself, at least in part, may have to shoulder some of the blame for the fact that so many Americans can no longer afford their homes.

Criticism of Greenspan centers on his endorsement of adjustable-rate mortgages, his resisting calls from some colleagues notably fellow Fed member Edward M. Gramlich to crack down on subprime home-loan practices and for maintaining low interest rates in the first half of the decade. That included keeping the key federal funds rate at 1 percent for a full year from June 2003 to June 2004, the lowest level since 1958.