The bailout debate

It’s not exactly an international incident, but there’s some trans-Atlantic friction developing over the handling of the financial bailout.

Ben Bernanke, the chairman of the United States Federal Reserve, said Wednesday that he “respectfully disagreed” with Angela Merkel, the German chancellor, about her recent criticism of efforts by the Fed and other central banks to stabilize Wall Street and the banking system.

“The U.S. and the global economies, including Germany, have faced an extraordinary combination of a financial crisis not seen since the Great Depression, plus a very serious downturn,” Mr. Bernanke told lawmakers Wednesday morning at a House Budget Committee hearing, after being asked to respond to the chancellor’s remarks. “In that context, I think that strong action on both the fiscal and monetary sides is justified.”

In a speech in Berlin on Tuesday, Ms. Merkel, normally quite diplomatic on such matters, broke character and forcefully denounced the decisions taken by the Fed and other central banks during the crisis, saying their aggressive actions could backfire.

“I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line,” Ms. Merkel said. “We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.”

Asked about this, Mr. Bernanke had no apologies for the Fed’s extraordinary efforts to rescue the nation’s financial system, which include a $1 trillion program intended to jump-start the credit markets.

“I am comfortable with the policy action the Federal Reserve has taken,” Mr. Bernanke said Wednesday. “We are comfortable we can exit from those policies at the appropriate time without inflationary consequences.”

Ms. Merkel, part of the conservative Christian Democratic Union, says she disagrees with the easy monetary policies instituted by the Fed and the Bank of England and thinks that they should be reversed.

New York Times