FED FOCUS-Bernanke acts while rest of Washington fumes

WASHINGTON/NEW YORK, March 19 (Reuters) - Federal Reserve Chairman Ben Bernanke this week took bold steps to help the economy while the rest of Washington raged over Wall Street's greed, raising the risk of a political gridlock that could hinder efforts to fight the financial crisis.

The U.S. central bank deployed every weapon in its arsenal on Wednesday to confront a deepening recession, as politicians across town spent the day fuming about bailouts and bonuses and called for the head of Treasury Secretary Timothy Geithner.

"The Fed is moving decisively to the forefront of fighting the crisis," said Mark Gertler, an economics professor at New York University and longtime associate of the Fed chairman.

"All along Bernanke has been committed to using the full powers of the Fed to combat the crisis. The political climate only adds to the sense of urgency," he said.

The Fed unleashed an additional $1.15 trillion of stimulus, saying it would buy up to $300 billion of longer-dated Treasury securities, and $850 billion more of mortgage agency debt and mortgage-backed securities than previously planned.

On Capitol Hill, where lawmakers have a mountain of work before them to tackle the economic crisis, politicians were consumed with anger over $165 million in bonuses paid to American International Group AIG.N. executives.

The mood does not bode well for any further handouts from the public purse.

"The advantage the Fed brings to the table in this type of policy environment is that they can move quickly and decisively," said Dean Maki, co-chief U.S. economist at Barclays Capital in New York.

"Part of the reason for doing this move now was a fear that some of the other measures might take longer than they had hoped to be put into place," he said.

Topping Maki's to-do list is Geithner's planned public-private partnership to take so-called toxic assets off bank balance sheets.

President Barack Obama told lawmakers on Feb. 24 it was likely that the $700 billion bailout fund they approved in October would not be enough to fix damaged banks.

POLITICAL WILL

Congress agreed to set up the bailout fund after the failure of investment bank Lehman Brothers pushed the global financial system to the verge of collapse. Insurer AIG was rescued a few days after Lehman went down and its bailout now stands at around $180 billion, hence the anger.

Bernanke appeared in a rare television interview with CBS' "60 Minutes" news program on Sunday, marking a major escalation in the Fed chief's communications tactics. In the interview, he warned that his greatest fear was that politicians would balk at taking steps that would cost them popular support.

"The biggest risk is that ... we don't have the political will. We don't have the commitment to solve this problem, and that we just let it continue. In which case ... we can't count on recovery," Bernanke said when asked what kept him up at night.

A senior Treasury official said on Saturday the toxic asset plan would be rolled out in detail this week, but an official said on Wednesday the unveiling might slip to early next week.

This delay, amid the fury over AIG bonuses, could have reminded Bernanke of the danger of counting on politicians to move with sufficient speed.

Investors believe "the reason they (the Fed) went so big yesterday was because they realize they are not going to get help from anyone else in Washington. They have to do it on their own," said Mike Feroli, an economist at JP Morgan Chase in New York.

In addition, the intense political scrutiny of banks that have taken taxpayer money appears to be discouraging investors from participating in a Fed program to boost consumer and small business lending launched this week.

The Term Asset-Backed Securities Loan Facility could grow to as much as $1 trillion, if the Fed can lure investors.

Douglas Landy, a partner in law firm Allen & Overy in New York, said he was aware of a great deal of caution among potential investors who have a "fear of being seen to be making too much profit in a government-sponsored program."

The Fed would have been fully conscious of this wariness as it reviewed its policy options on Wednesday, and this sense may have tipped the balance in favor of more drastic Fed action.

"(Bernanke) understands, better than anyone, that governments cannot afford to dawdle in a situation like this," said NYU's Gertler. (Writing by Alister Bull; Editing by Chizu Nomiyama)