By Scott Lanman
Aug. 27 (Bloomberg) -- Ben S. Bernanke's critics from Washington to Wall Street are starting to ask whether the Federal Reserve chairman is ready for a prime-time crisis.
The global credit crunch is proving the severest test of Bernanke's 18-month tenure atop the U.S. central bank as he tries to avoid a recession while steering clear of bailing out those who made risky investments.
Some seasoned Fed watchers say he should have avoided the optimistic assertion that the damage caused by subprime mortgages was ``contained'' before the collapse of credit in the world's money markets prompted extraordinary central bank intervention earlier this month. Now, as he resists demands to cut the benchmark interest rate, the faultfinding, some from former Fed policy makers, has escalated to charges that he's behind in the game and losing his credibility and effectiveness.
``This is a make-or-break moment for Bernanke,'' says David M. Jones, a former Fed economist who has written books on the central bank. ``It is an early and maybe ultimate test'' for the Fed chairman, who finds himself in ``a position of weakness, not strength.''
Bernanke, 53, hasn't made any public comments since July. He'll break his silence with a speech on housing and monetary policy Aug. 31 at the Fed's annual retreat-cum-symposium in Jackson Hole, Wyoming, before central bankers and economists from around the world.
`Oblivious to Pain'
The Fed Aug. 17 cut the cost of direct loans to banks and revised its economic outlook, opening the door to lowering the benchmark interest rate. Before that, ``there was this growing sense that he was oblivious to the pain in the marketplace,'' says Lehman Brothers Holdings Inc. chief U.S. economist Ethan Harris.
``Monetary policy is very much about confidence,'' says Harris, a former New York Fed official who'll be in the audience when Bernanke speaks. ``If the Fed doesn't unfreeze the markets, we'll have a recession, but also reputationally it's important'' for Bernanke.
Bernanke's performance in a crisis is being compared with that of his predecessor, Alan Greenspan, whose make-or-break moment came less than three months into his chairmanship. When stocks crashed in 1987, Greenspan pumped out money to help the economy rebound, bolstering credentials that some politicians had doubted. ``That was an extraordinary baptism of fire,'' Greenspan, 81, said this year.
Greenspan's Experience
Greenspan was a respected economic forecaster before joining the Fed and was well-known in Washington, having served as an adviser to Presidents Richard M. Nixon and Gerald R. Ford. He often based his economic outlook on his own research and experience. Bernanke, a former Princeton University professor, came to the Fed without Greenspan's Washington experience and relies more on economic models and forecasts to guide his views.
Bernanke has weathered criticism before. As a Fed governor in 2002, he earned the title of ``Helicopter Ben'' when he said the Fed would do everything necessary to fight a deflationary slump, a strategy he compared to a ``helicopter drop'' of money.
As chairman in April 2006, Bernanke said the Fed might pause from raising rates even if economic risks were still tilted toward inflation. His candor made him appear soft on inflation to some bond investors.
Those incidents pale beside the pressure Bernanke faces now, in the most tumultuous month of his tenure.
On Aug. 7, Bernanke and the Federal Open Market Committee voted at their regular session to reiterate that inflation was their main concern, while acknowledging increased economic risks. Three days later, the Fed pumped $38 billion into the banking system -- the most since after the 2001 terrorist attacks -- in its first effort to contain the credit crunch.
Unprecedented Steps
The following week, with borrowing continuing to dry up, the Fed took steps unprecedented in recent years: It cut the rate on direct loans to banks while issuing a revised outlook that acknowledged economic risks had risen ``appreciably'' and omitted any mention of inflation.
While some of the turmoil subsided, many financial-market participants clamored for Bernanke to follow the discount-rate cut with an immediate reduction in the benchmark federal funds rate to stimulate the economy.
His defenders say Bernanke's decision to stop raising interest rates a year ago ultimately proved correct, and so will his policies now.
Bernanke's Defenders
One who'll speak up for Bernanke's approach at Jackson Hole is Stanford University economist John Taylor, a former Treasury official. The Fed has made ``good decisions'' in the past two weeks, he said in an interview.
Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, agrees: ``Bernanke's handled this very well, despite some hysterical cries on Wall Street.''
``He's been very balanced, setting up the possibility of a fed funds cut, but for the right reasons,'' Hoffman says.
Bernanke's academic work, which includes a study of the Fed's role during the Great Depression, equips him well to deal with the current crisis, says Lyle Gramley, a former Fed governor and now senior economic adviser to the Stanford Group Co. in Washington.
``The economist who has done the seminal work on the impact of credit crunches on the economy is named Ben S. Bernanke,'' says Gramley, 80, who'll also be at Jackson Hole. ``He's well aware of the fact that this situation could pose serious downside risks for the U.S. economy. His views are the ones that are going to ultimately prevail.''
Even so, criticism of Bernanke continues to mount, including an unusual public airing from former Fed policy makers.
Former Policy Makers
Former Fed governor Wayne Angell, 77, wrote an opinion column in the Aug. 23 Wall Street Journal calling for a cut in the federal funds rate and saying the central bank ``will continue to fall behind'' if it waits for more evidence of an economic slowdown.
``What the Fed did was too slow, and maybe it's because they're too cloistered,'' Martha Seger, 75, a Fed governor from 1984 to 1991, said in an interview. ``They're out of touch with what's going on in the real world. The problems that are out there go way beyond Wall Street.''
And former Dallas Fed President Robert McTeer, 64, said in an interview that he disagreed with the Fed's Aug. 7 view that inflation was still the ``predominant'' concern.
Some members of Congress are joining in.
`More Assertive'
Senator Sherrod Brown, an Ohio Democrat who serves on the Banking Committee, said in an interview that he wishes Bernanke had been ``a bit more assertive and aggressive on pre-empting much of this and in fixing what he can.''
Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, wants to discuss the issue after returning from Congress's August recess: He is convening a hearing on the market turmoil Sept. 5 with Fed and Treasury officials.
Frank said in an interview he continues to believe Bernanke ``is as good as we could have gotten from this administration.'' Still, Frank says, ``I am troubled that he is too much of an `inflation-is-the-only-issue' chairman.''
Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat, summoned Bernanke and Treasury Secretary Henry Paulson to an hour-long meeting Aug. 21 and said Bernanke had agreed to use ``all of the tools at his disposal'' to restore stability in financial markets.
When he speaks, Bernanke may end up disappointing investors who are looking for fresh guidance on Fed policy.
Bernanke will ``say absolutely nothing about what the Fed might do,'' said former Fed vice chairman Alice Rivlin, 76, now a senior fellow at the Brookings Institution in Washington. ``He just wants to make everybody feel that the Fed is in good hands and that he is in charge.''
