March 31 (Bloomberg) -- Some politicians seem determined to undermine the Federal Reserve's credibility by questioning whether the Fed should have acted to ward off the failure of Bear Stearns Cos.

Would they have preferred a succession of failures by major financial institutions that might have precipitated an economic disaster of soul-searing proportions?

Some observers, such as Martin Wolf of the Financial Times, cast the long-term implications of the rescue in the gloomiest terms.

``Remember Friday, March 14, 2008: it was the day the dream of global free-market capitalism died,'' Wolf wrote on March 25.

There was no systemic failure a couple of weeks ago because a deal was struck, with the help of the Fed, for JPMorgan Chase & Co. to acquire Bear Stearns. Had Bear Stearns gone belly up, maybe that wouldn't have brought down any other institution.

Still, the risk was there, and the two U.S. Senate committees that have announced investigations of the Bear Stearns sale should keep that in mind.

In most of the discussion about the deal -- which in some important ways was without precedent -- it has been labeled a bail out of Wall Street's wealthy.

Senator Max Baucus of Montana, chairman of the Senate Finance Committee, didn't use those words on March 26 when he announced the committee had asked Alan Schwartz and James Dimon, the chief executive officers of Bear Stearns and JPMorgan Chase, respectively, Fed Chairman Ben S. Bernanke, New York Fed Bank President Timothy Geithner and Treasury Secretary Henry Paulson to provide ``exact details of the sale agreement, how and by whom it was negotiated, and all parties to it.''

Populist Politics

``Economic times are tight on Main Street as well as Wall Street, and we have a responsibility to all taxpayers to review the details of this deal,'' Baucus said.

Such a review is appropriate. What isn't appropriate is continuing to play populist politics by pretending that the interests of Main Street and Wall Street aren't aligned when the stability of the financial system is at stake.

``With jurisdiction over federal debt, it's the Finance Committee's responsibility to pin down just how the government decided to front $30 billion in taxpayer dollars for the Bear Stearns deal, and to monitor the changing terms of the sale,'' Baucus said.

The ranking Republican on the committee, Senator Chuck Grassley of Iowa, agreed with Baucus's emphasis.

Turf Battle

``Separate from the question of what was needed, or not, to avoid a market panic in the Bear Stearns case are the implications of the deal for the taxpayers,'' Grassley said. ``Congress has a responsibility to look at whether the taxpayers will lose money here.''

Talk about penny-wise and pound-foolish. If the deal was necessary to avoid a market panic, the cost would be more than worth it even if every cent went down the drain.

Getting in on the act was Democratic Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee, who said on March 26 that he would convene a separate hearing on the Bear Stearns deal on April 3 with the same cast of characters plus Christopher Cox, chairman of the Securities and Exchange Commission.

Cox is an important addition because the SEC has oversight of investment banks. Dodd's invitation also asks about the implications for future regulation of ``entities'' that get support from the Fed.

Paulson has announced plans to be in China on April 3 so there is a possibility the hearing will be postponed.

Risk to Taxpayers

In a March 26 speech, Paulson said additional oversight by the Fed is in order for non-depository financial institutions that may be eligible for Fed help. Whether that would constitute Wolf's death of free-market capitalism is doubtful.

However, if you want to look at the Bear Stearns deal in terms of the risk to taxpayers, the odds really are better that the Fed will make money than lose it.

The Fed hasn't said just what Bear Stearns assets became collateral for the loan. We do know that they had already been marked down in a very illiquid market and that they won't necessarily have to be sold for years to come.

Under terms of the deal, JPMorgan Chase is responsible for the first $1 billion of any losses.

Needless Carping

``We do not subscribe to the view that this arrangement is necessarily at taxpayers' expense,'' said Ray Stone of Stone & McCarthy Research Associates. ``Indeed, it is quite possible that the Fed actually makes money, and earns a larger than otherwise surplus to be turned over to the Treasury.''

More to the point, Stone said, the Fed did this to maintain the soundness of the financial system, not to make money.

Perhaps if the Bear Stearns crisis hadn't erupted almost overnight, some more elegant ways might have been found to deal with it. That's the nature of financial crises though, and a lot of carping about risks to taxpayers isn't going to do anyone any good, except perhaps politicians who want to beat the populist drums.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net

Last Updated: March 31, 2008 00:01 EDT