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We've been going back to the days last September that found the global financial system teetering on the edge of collapse. Large financial institutions were sinking, swamped by losses linked to subprime mortgages. The government had just stepped in to rescue giants like Fannie Mae and Freddie Mac. Days later, it would do the same for insurance giant AIG. At the White House, President Bush was defending the government response.

President GEORGE W. BUSH: America's economy is facing unprecedented challenges, and we are responding with unprecedented action.

MONTAGNE: That unprecedented action included dramatic moves by the Federal Reserve and its chairman, Ben Bernanke. As part of our look back at the financial crisis, NPR's John Ydstie assesses the extraordinary role of the Fed.

JOHN YDSTIE: In the early stages of the financial crisis, it was the Federal Reserve that did the heavy lifting. That's because only it could commit billions to the rescue quickly. After all, the Fed can create money out of thin air, something the Treasury and even the Congress can't do.

And speed was of the essence, says Mohamed El-Erian, CEO of the giant investment firm PIMCO. El-Erian says he remembers vividly the fear and uncertainty in the financial markets one year ago this week.

Dr. MOHAMED EL-ERIAN (CEO, PIMCO): And I also remember I called my wife up and said, Jaime, go to the bank, go to ATM and pull out as much cash as you can, because I'm not sure whether the banks will open tomorrow.

YDSTIE: What triggered the panic was the government's decision to let the Wall Street firm Lehman Brothers fail. Investors had expected a rescue, since the Fed and the Treasury had saved Fannie and Freddie just days before and bailed out the investment bank Bear Stearns six months earlier.

Trust evaporated, and lending between banks seized up, says El-Erian.

Dr. El-ERIAN: Had the Fed not stepped in at that point, using unconventional policies, we would be facing Depression number 2.0, which would have made the '30s seem less bad than they actually were.

YDSTIE: Just two days after Lehman collapsed, the government changed course and rescued insurance giant AIG, with the Fed providing an $85 billion loan. That surprised former Fed Vice Chairman Alan Blinder.

Mr. ALAN BLINDER (Former Fed Vice Chairman): If you think about this, this was an insurance company, never regulated by the Fed. And the Fed sort of quasi-nationalized it, just like that. It was stunning.

YDSTIE: The Fed had always been the lender of last resort to depository institutions, like commercial banks. But it had not lent to investment banks in 60 years, and never before to insurance conglomerates. As the crisis developed, the Bernanke Fed continued to surprise. It lent to money market funds when the Lehman collapse threatened that industry. It backstopped the huge commercial paper market to keep short-term loans flowing to businesses. The Fed provided billions to support lending for auto loans, residential and commercial mortgages and student loans. At its peak, Fed lending to fight the financial crisis totaled nearly one-and-a-half trillion dollars. Again, Alan Blinder.

Mr. BLINDER: It looked at this situation - I mean, this is to Bernanke's everlasting credit - and said, you know, one of the things the financial markets are really short on now is the willingness to take risk. And it said to itself, well, we can take risk, and that's what they started doing.

YDSTIE: So how much will those risks cost taxpayers? Blinder thinks the Fed won't lose more than $30 billion on its emergency lending. That's because for the most part, the loans are backed by strong collateral. And, says Blinder, the Fed could actually make money because it charges fees and interest on its loans, which should more than offset any losses. Of course, taxpayers could lose lots of money in other rescue efforts like the TARP, but that's not a Fed program.

Vincent Reinhart, a former Fed official now at the American Enterprise Institute, agrees the Fed could end up making money. But he believes the Fed's intervention has been damaging in other ways. He says the popular-but-mistaken version of events was that the global financial system was hit by a perfect storm and the Fed came to the rescue.

Mr. VINCENT REINHART (American Enterprise Institute): And the vision that we have is Ben Bernanke in the yellow slicker, fighting the elements to keep the ship of the economy afloat. I think that's the wrong metaphor, because policy actions influenced the course of the storm.

YDSTIE: And he says actually made the financial crisis worse.

Specifically, Reinhart argues, Bernanke - along with Treasury Secretary Henry Paulson and Timothy Geithner, then president of the New York Fed - made a big mistake when they decided the government should rescue Bear Stearns back in March of 2008.

Mr. REINHART: Policymakers didn't seem to explore enough alternatives before they arrived at the conclusion that they should lend to an investment bank for the first time in 60 years.

YDSTIE: Reinhart says that set up the panic of last September, because when Lehman Brothers faltered, Wall Street expected the government would rescue it. It didn't. Some say responsibility for that decision falls largely on then-Treasury Secretary Paulson, who reportedly fumed about being called Mr. Bailout after the rescue of Fannie and Freddie and Bear Stearns.

On the day of Lehman's bankruptcy, here's how Paulson explained the decision to withhold government aid.

Mr. HENRY PAULSON (Former Treasury Secretary): I don't take lightly ever putting the taxpayer on the line to support an institution.

YDSTIE: In a "60 Minutes" interview last March, Bernanke suggested he had argued against letting Lehman fail, but was powerless to stop it.

(Soundbite of TV show, "60 Minutes")

Mr. BEN BERNANKE (Federal Reserve Chairman): There were many people who said, let them fail, you know. It's not a problem. The markets will take care of it. And I think I knew better than that. And Lehman proved that you cannot let a large, internationally active firm fail in the middle of a financial crisis. Now, was it a mistake? It wasn't a mistake for the following reason: We did not have the option. We didn't have the tools.

YDSTIE: Bernanke points out the Fed can only lend to firms that can put up solid collateral, and Lehman couldn't.

Alan Blinder, now a professor at Princeton, says that nevertheless, letting Lehman collapse was a huge mistake. But, he says, since then, the Bernanke Fed has been creative and effective in attacking the credit crisis.

Mr. BLINDER: The irony is, I think, in some sense the period from late September of last year to now has been the Fed's finest hour. But the Fed is struggling now to maintain its independence, and there's a lot of objection to giving it more authority, which the Treasury has proposed in the financial reform.

YDSTIE: The Obama administration wants to make the Fed a super regulator that would monitor risks to the whole financial system. But even prominent Democrats like Connecticut's Senator Chris Dodd are skeptical.

Senator CHRIST DOBB (Democrat, Connecticut): Giving the Fed more responsibility at this point is like a parent giving his son a bigger, faster car right after he crashed the family station wagon.

YDSTIE: Many lawmakers believe the Fed could have done more to restrain reckless mortgage lending and prevent the crisis.

In addition, says Vincent Reinhart, its rescue of big financial firms has given the Fed an image problem.

Mr. REINHART: The general public sees it more as an institution to help the big guy and one that is willing to tilt the playing field in the advantage of Wall Street.

YDSTIE: To fight that perception, Bernanke is taking his case directly to the public. In another break with precedent, the chairman has granted television interviews and even answered questions from regular folks in a televised town hall meeting. He hopes to convince Americans that the extraordinary actions the Fed has taken during this financial crisis make it deserving of the public trust.

John Ydstie, NPR News, Washington.

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