Sunday NYT Page 1: Fed Chief Shifts Path, Invents Policy In Crisis

[bicentennial_baby]

WASHINGTON — As chairman of the Federal Reserve, Ben S. Bernanke has long argued that a central bank should base its policies as much as possible on consistent principles rather than seat-of-the-pants judgment.

But now, as the meltdown in credit markets threatens major institutions on Wall Street and a recession appears inevitable, Mr. Bernanke is inventing policy on the fly.

“Modern monetary policy-making puts a lot of weight on rules, but there is no rule book for an economic crisis,” said Douglas W. Elmendorf, a senior fellow at the Brookings Institution and a former Fed economist.

On Friday, the Federal Reserve seemed to toss out the rule book altogether when it assumed the role of white knight, temporarily bailing out Bear Stearns, one of Wall Street’s biggest firms, with a short-term loan to help avoid a collapse that might send other dominoes falling.

That move came just days after the Fed announced a $200 billion lending program for investment banks and a $100 billion credit line for banks and thrifts. In a move that would have been unthinkable until recently, the central bank agreed to accept potentially risky mortgage-backed securities as collateral.

On Tuesday, the central bank is expected to reduce short-term interest rates for the sixth time since September. The Fed has already lowered its benchmark federal funds rate to 3 percent from 5.25 percent, and investors are betting that it will cut the rate to just 2.25 percent on Tuesday.

http://www.nytimes.com/2008/03/16/business/16bernanke.html?hp