Fed boss Bernanke 'holding his nose' over bailouts

Federal Reserve chairman Ben Bernanke said he had to “hold his nose” over last year’s taxpayer-funded bailouts of financial giants.

But Mr Bernanke defended the action as necessary to avoid a major meltdown of the US financial system and the broader economy.

His comments came during a town-hall style meeting in Kansas City, Missouri, where he was peppered with questions about government decisions last year to rescue so-called “too big to fail companies” like insurance giant American International Group, whose collapse could have damaged the global economy.

The Fed chief, who took the helm on February 2006, has been on the front lines of efforts to battle the financial crisis and end the recession, the longest since the Second World War.

His aggressive and unconventional actions – including supporting the bailout of AIG to the tune of more than $180bn (€126bn) – have been credited with averting a financial catastrophe last year, but also have sparked anger from the public and politicians about helping financial companies that made reckless gambles.

A small-business owner complained to Mr Bernanke that such actions were “hard to swallow”, saying he felt like small businesses – also struggling to survive the recession and all the financial fallout – were being short-changed.

“Nothing made me more frustrated, more angry, than having to intervene” when companies were “taking wild bets,” Mr Bernanke said. But not acting would have had grave consequences for the economy, he added.

“I was not going to be the Federal Reserve chairman who presided over the second Great Depression. I had to hold my nose. ... I’m as disgusted as you are. ... I absolutely understand your frustration.”

Public television’s Jim Lehrer moderated the one-hour town hall meeting, which will be shown this week in three instalments on PBS’ The NewsHour with Jim Lehrer.

At the height of the financial crisis last autumn, Mr Bernanke recalled spending nights on the sofa in his office.

It was a “perfect storm”, he said, with housing, credit and financial problems converging into a major crisis the likes of which have not been seen since the 1930s.

The financial crisis underscored the need for Congress to pass laws that would create a government mechanism for safely unwinding big financial companies, along the lines of the process used by the Federal Deposit Insurance Corporation to handle failing banks, Mr Bernanke said.

When asked about the Fed’s diligence in protecting consumers, Mr Bernanke acknowledged that “we were late in addressing the sub-prime lending problem”, referring to the risky mortgages and dubious lending practices that powered the housing boom and contributed to its crash. “We have to take some heat for that.”

Still, he made the case – as he did last week on Capitol Hill – that consumer protection oversight should stay with the Fed.

An Obama administration proposal would create a new consumer protection agency overseeing mortgage, credit cards and other financial products, stripping the Fed of some of its duties.

When Mr Lehrer said some people thought the Fed was the fourth branch of the government, Mr Bernanke responded: “That’s a tremendous exaggeration.”

He said the Fed’s independence from political interference in setting interest rates to influence economic activity was crucial.

“You get much better results” for the economy when this is the case, he said. “We’re very, very sensitive to this issue.”

Mr Bernanke’s appearance on the programme is part of an broader campaign, unusual for a Fed chairman, to reach out to ordinary Americans. In March he granted a rare TV interview, appearing on CBS’ 60 Minutes.

His efforts to explain the Fed’s actions to get the economy and financial markets back on firm footing comes as the clock ticks on his term as Fed chief. The term expires early next year and President Barack Obama has not said whether he will be reappointed.