In midst of crisis, Fed faces dissent inside, out

The biggest financial crisis in a generation -- a downturn that officials at the Federal Reserve acknowledged in minutes released Tuesday may be "prolonged and severe" -- is turning the traditionally reserved and omniscient central bank into an institution that seems to be in the throes of family therapy.

In a speech Tuesday, Paul Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben Bernanke, for toeing "the very edge" of the bank's legal authority in orchestrating last month's bailout of the beleaguered investment bank Bear Stearns.

"Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank," Volcker told members of the Economic Club of New York.

His remarks came on the same day that Alan Greenspan, Bernanke's immediate predecessor as chairman, deflected criticism of his tenure in an interview with The Wall Street Journal, dismissing claims that his policies had stoked an untenable housing bubble as "unfair."

But in defending his own stewardship of the economy over 18 years, a period of generally healthy growth and low inflation, Greenspan was forced to dredge up some painful memories that have come back to haunt the Fed.

"I don't know of any time when previous chairmen were so openly discursive about the current arrangements," said Allan Meltzer, an economist at Carnegie Mellon and the leading historian of Fed policy. In the past, he said, "they just didn't discuss."

Indeed, Volcker also implicitly questioned Greenspan's cheerleading of the "bright new financial system" that "for all its talented participants, for all its rich rewards, has failed the test of the marketplace."

In his time as chairman, Volcker insisted that the Fed speak in a single, firm voice and sought to quell dissent in its ranks. He faced only one open revolt on the board of governors, in 1986, which nearly led to his resignation. But it was his challenger, Preston Martin, who stepped down.

Greenspan continued the autocratic tradition, gaining a reputation for opaque policy pronouncements that, like Volcker's, required a carefully cultivated expertise to interpret. And he stood firm: In his interview, Greenspan said he did not regret a single decision he had made during his time as the Fed chairman.

Bernanke, who took over the chairmanship in 2006 promising greater transparency for the central bank, has struggled to maintain the same level of support.

Minutes released Tuesday of the Fed's March 18 policy meeting revealed strenuous disagreements among top central bankers, with two of the 10 officials present voting against the decision to lower interest rates by three-quarters of a point.

While not unprecedented, it was the first dual dissent since September 2002.

"It's a club, and the members of the club tend to be supportive of a club, and particularly of the chairman," Meltzer said. "It's not popular to dissent."
The dissenters -- Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia branch -- said a rate cut would further fuel inflation, which has grown faster than anticipated on the back of high prices for gasoline and food.

The dissenters also argued that the Fed's other efforts to restore confidence among lenders -- including its decision to provide cheap loans to investment banks in exchange for relatively risky collateral -- were a more effective and time-sensitive approach to improving the economy.

"Two voting members who explicitly see the world differently is a notable development," said Robert Barbera, chief economist at ITG, an investment and research firm.

Ultimately, the minutes said, "most members judged that a substantial easing in the stance of monetary policy was warranted."

At the meeting, most of the members said they believed the economy would probably contract in the first half of the year, and they said a "prolonged and severe economic downturn could not be ruled out."