Ex-Fed aide criticizes rescue of Bear Stearns

Vincent Reinhart, a former top Federal Reserve aide, said Monday that the central bank’s rescue of Bear Stearns Cos. was the “worst policy decision in a generation.”

Fed officials invoked emergency powers last month to loan $13 billion to Bear Stearns after the fifth-largest U.S. securities firm said it was considering filing for bankruptcy.

“The panicked decision jumped over other possibilities” and may prove as damaging as Fed policy errors that caused the “great contraction” of the 1930s and the “great inflation” of the 1970s, said Reinhart, who was a senior policy advisor to former Fed Chairman Alan Greenspan and the current chairman, Ben S. Bernanke.

The Fed’s Board of Governors invoked an emergency rule March 14 to loan the money to Bear Stearns after the firm informed New York Fed officials that it would have to file for bankruptcy. Two days later, the Fed agreed to finance $30 billion of illiquid Bear assets to secure its takeover by JPMorgan Chase & Co.

The Fed on March 16 also opened up lending to investment banks, another unusual extension of credit by the Fed to non-bank corporations.

The Fed’s actions “eliminated forever the possibility that the Federal Reserve could serve as an ‘honest broker,’ ” Reinhart said in a slide presentation. The central bank also “tilted the political playing field toward direct mortgage relief.”

Reinhart spoke at a seminar at the American Enterprise Institute in Washington, where he is a resident scholar.