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Federal Reserve chairman Ben Bernanke took a half-step out of the shadows Wednesday. But for all his talk of transparency, Bernanke seems more intent on shoring up the Fed’s political flanks than on opening up the central bank’s books.

Bernanke said in testimony before the House Financial Services Committee that he would support a Government Accountability Office review of the Fed’s emergency lending facilities, and would back legislation identifying the firms taking Fed funding in these programs "after an appropriate delay."

This represents a softening of Bernanke’s opposition to an audit of some Fed operations by the GAO, the investigative arm of Congress.

In November, a congressional subcommittee approved an amendment calling for a full-fledged audit, prompting Bernanke to warn that a "takeover" of monetary policy by Congress could undermine market stability.

But Bernanke hasn’t forgotten about the Fed’s cherished independence. His pledge Wednesday to cooperate with an expanded GAO audit stops well short of giving Congress any oversight of monetary policy — the decisions the Fed makes regarding interest rates and banking reserves that affect the amount of money sloshing around in the economy.

"Clearly he’s trying to offer Congress something of a compromise, so he can keep monetary policy out of the discussion," said Mark Calabria, a former Senate Banking Committee staffer who is now director of financial regulation studies at the libertarian Cato Institute in Washington.

Bernanke’s proposal comes as anger over the financial bailouts of 2008 and 2009 has continued to build. Critics say the Fed has failed to fully explain how it arrived at bailout decisions that cost taxpayers billions of dollars.

Bernanke was expected to win reconfirmation to his four-year post as Fed chief in routine fashion. But the outcome appeared in doubt for much of last month before lobbying by the White House in Congress finally pushed the Senate to a 70-30 vote to reconfirm him.

With the economy struggling through the early stages of a jobless recovery and the government widely perceived to be in the pocket of Wall Street, it behooves Bernanke to meet his less vocal critics in Congress halfway, in hopes of forging a deal to preserve the Fed’s independence to set monetary policy.

"My sense is that he has seen the writing on the wall and realized that they cannot hide behind a veil of secrecy given the public outrage," said University of Oregon economics professor Tim Duy, who follows monetary policy at his Fed Watch blog fast cash without a hassle.

Yet it would be a mistake to make too much of this latest shift, given all the loopholes in the sort of audit Bernanke evidently envisions.

For instance, much of the anger over the bailouts has focused on the Federal Reserve Bank of New York’s handling of its multistage, multibillion-dollar rescue of AIG (AIG, Fortune 500). Documents subpoenaed by Congress this year show the New York Fed pressured the insurer not to disclose the terms of the bailout in securities filings even when the company wanted to.

The key issue there was a list of the securities that had been insured by AIG and the banks that had purchased the derivatives conferring insurance. The New York Fed repeatedly opposed the release of this list, which shows that big banks including Goldman Sachs (GS, Fortune 500) and Deutsche Bank (DB) of Germany received full compensation for securities worth much less in the market.

Duy said Bernanke’s proposal wouldn’t make such a list of securities accepted as collateral or purchased by the Fed available to the public, though "this is what I think most critics really want."

That said, it wasn’t clear what one of the loudest and most persistent foes of the Fed, Rep. Ron Paul, R-Texas, was after Wednesday in his questioning of Bernanke.

Apparently making a case for an audit, Paul rambled on about the Fed’s alleged loans to Saddam Hussein in the 1980s and its purported plans to fund a bailout of Greece.

Bernanke responded that the allegations were "absolutely bizarre" before adding that the Fed has no plans to participate in a bailout of any foreign country.

As wacky as the exchange was, it could actually strengthen the case for a full audit. Regular reports from the GAO can only boost the pitifully low level of economic understanding in Congress, Calabria said.

And with rates already near zero and the Fed having spent more than $1 trillion supporting housing, the Fed may already appear to be bowing to political pressure to make sure the economy doesn’t deteriorate further in a key election year.

"I’m open to the case that we need Fed monetary independence, but I just don’t know that the Fed has made it persuasively," Calabria said. "It’s hard to believe Congress could make policy any looser than it is." 

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Cape Town: Treasury Secretary Henry Paulson signalled to US trading partners that the dollar will rebound from a record low, predicting it will reflect “long-term strength” in the American economy.

“He’s trying to instill a bit of confidence in the market, in the dollar,” said Jens Nordvig, senior global markets economist at Goldman Sachs Group in New York. “That’s the purpose of this. This is what European policy makers want to hear, Canadians as well.”

Paulson, travelling to Cape Town to meet with his counterparts from the world’s biggest economies, said on Thursday that “our economy, like any other, goes through ups and downs.” He told reporters travelling with him that the six-year expansion will continue and that growth will ultimately be reflected in the value of the nation’s currency.

European, Canadian and Japanese officials have blasted volatility in exchange rates that took the dollar to its weakest since it was floated in 1971 fast cash loans. Paulson’s comments may help ease tensions as finance ministers and central bankers from the Group of 20 nations gather today and President George W. Bush meets with Japan’s Prime Minister Yasuo Fukuda.

Paulson’s efforts to strengthen his rhetoric began on November 8, when he said “the US has a very competitive, strong economy that’s proven itself over many years.” The next day, he told reporters in Washington “the dollar has been the world’s reserve currency since World War II and there’s a reason.”

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What has been happening to the world’s stock markets?

The value of the world’s major companies has taken a tumble as the world’s stock markets have plunged in the past two days.

The move has wiped billions of dollars off the value of shares owned by individuals and institutions such as pension funds and insurance companies.

The fall started in the US, but then spread first to Europe and then to Asia..

Why are shares falling?

In recent years, stock markets have been boosted by a takeover boom.

Lots of companies have been bought at high prices by private equity firms, who borrowed the money to do so from rich individuals and banks.

This has increased the price of other companies’ shares, in the hope that they could be next takeover target.

The banks have been more than willing to lend them to money at low rates - partly because global interest rates have themselves been at historically low levels, but also because they have been able to sell these debts on to others through credit markets.

And the low interest rates, in turn, have led to investors seeking higher returns for their money, further feeding the hunger to finance the loans behind takeover deals, as well as a range of more or less exotic investments.

But now the era of cheap money seems to be coming to a end, as lenders have suddenly realised how risky some of their investments in private equity firms might be.

The result is a rapidly-declining appetite among investors for underwriting this kind of lending - and thus the takeover boom may be coming to an end.

It also means that the banks and other financial institutions could be in trouble as they find themselves carrying much more of the private equity lending on their books than they expected to.

In the US, many such institutions are already exposed to losses on bad mortgage loans that were originally given to people with poor credit histories (so-called “sub-prime” lending).

What is the flight to quality?

When people with money to lend become worried about risks, they tend to put their money in safe investments no fax payday loans.

So there has been a rush to invest in government bonds, like US Treasury bonds, and safe currencies, like the yen.

In contrast, people are now demanding much higher interest rates to lend to smaller companies or to the governments in developing countries.

And there is almost no market at the moment for the debt relating to sub-prime mortgages or leveraged buy-outs.

How long will it go on?

Stock market fluctuations are a normal part of stock market activity, and no one can say how far shares could fall or how long the slowdown could go on.

Markets have had quite a sharp rise in the past 18 months, and the current correction may simply return them to the previous level.

Broadly, company profits have been strong, and the world economy seems to be entering a period of revival, especially in Europe and Japan.

However, stock markets look at future expectations, so they may be concerned that corporate profits have already peaked.

And even if stock markets recover, it looks like the re-pricing of risk - making it more expensive to borrow for certain kinds of investments - is here to stay.

And the world’s major central banks - with the exception of the US Federal Reserve - look set to continue to raise interest rates to combat inflationary fears.

What will it mean to you?

Many individuals own stocks and shares - around half of all US households, and around one-quarter in the UK.

If the stock market falls continue, they may feel less wealthy - and be less likely to buy goods and services, slowing the economy.

In addition, many pension funds own shares which make up part of their portfolio used to pay people’s occupational pensions.

If shares fall, they may have less money to pay future pensions, and employee contributions may have to rise.

Already in both the UK and US many companies have closed company pension schemes to new employees.

Finally, the impact on businesses could be mixed.

Smaller, more risky ventures could find it more difficult to get funding, slowing the pace of innovation.

But big companies might become less vulnerable to takeovers, which could mean fewer job losses and restructuring costs as long as profits keep up.
by news.bbc.co.uk