Jan. 20 (Bloomberg) -- This may be as close as we’re going to get to a Fed chairman labeling some in Congress as irresponsible.

Sure, Federal Reserve Chairman Ben S. Bernanke was typically careful with his wording in a Jan. 13 speech in London. “The public in many countries” is “understandably concerned” that government is spending money to rescue the financial industry, “when other industries receive little or no assistance,” Bernanke said.

After explaining how the world economy “is critically dependent on the free flow of credit,” Bernanke issued his challenge: “Responsible policy makers must therefore do what they can to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest.”

Three days after that speech, 33 of 39 Republican senators ignored Bernanke’s warning and voted against releasing the remaining $350 billion in Troubled Asset Relief Program money. (So did eight Democrats, mostly liberals, plus independent Bernie Sanders of Vermont.) Fortunately, that left enough supporters, mostly Democrats, to clear the release of the much-needed money.

Too many senators shrugged their shoulders at Bernanke’s wise words.

OK, perhaps they didn’t like the way Treasury Secretary Henry Paulson had jerked them around by not using the first half of the TARP money as he said he would -- to help banks by buying troubled assets, most of them related to mortgages. Or maybe they didn’t like something else about the program.

Their Own Worries

And of course many of their constituents, who have their own financial and job worries as the economy falls deeper into recession, indeed are furious that banks that created the crisis are getting help when it seems ordinary people aren’t.

They aren’t going to be any happier that the new administration of Barack Obama may have to come to Congress in the next few months to seek to enlarge the TARP yet again. In all probability, $700 billion won’t be enough.

The need for more TARP funds was reinforced just hours after the Senate vote, with a midnight announcement from the Fed of major new assistance to Bank of America Corp.

The Fed said it would provide protection for the bank against the possibility of “unusually large losses” on $118 billion worth of assets mostly tied to residential and commercial real estate held by Merrill Lynch & Co. when Bank of America acquired it last year. In addition, Treasury will invest $20 billion of TARP money in the bank in exchange for preferred stock that will pay an 8 percent dividend.

Use of that $20 billion leaves $330 billion. There will be many demands for that remainder, many essential to meet.

Original Purpose

First off, Bernanke suggested in the speech that it may be time to return to TARP’s original purpose -- dealing with troubled assets. As long as bank balance sheets are stuffed with them, private investors aren’t willing to provide new capital.

Such assets might be purchased with TARP money, backed with some type of guarantee or absorbed by a new “bad bank” capitalized through TARP. On Jan. 16 Paulson told reporters that “a lot of work has been done on an aggregator bank” along those lines, and Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said in a CNBC interview that the idea might have “some merit.”

Any one of Bernanke’s three approaches might require a large share of the $330 billion to have any impact.

Meanwhile, as the recession causes more bank loans to sour, some large institutions might need more TARP capital to stay alive -- as was the case with Citicorp Inc. and Bank of America.

Many members of Congress also want to make sure a portion of the TARP money is used to finance an expanded effort to modify mortgages to avoid home foreclosures. As much as $100 billion might be used in this politically popular way.

Competing Demands

There are yet other important uses for the limited TARP money.

Next month the Fed will begin making loans secured by AAA- rated asset-backed securities collateralized by student, auto and credit-card loans, and those guaranteed by the Small Business Administration. The Fed felt comfortable creating this new facility only because Treasury committed $20 billion from TARP for supplementary loss protection.

Bernanke said this latest effort might be expanded -- if the TARP money hasn’t already run out.

At some point, politicians are going to have to stop pandering to their constituents and show leadership by explaining why the economy can’t survive without a banking system.

(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: January 20, 2009 00:01 EST