Who’d be a central banker? When Federal Reserve Chairman Ben Bernanke was whisked into a stage-managed, on-camera meeting with Senator Christopher Dodd and Treasury Secretary Hank Paulson last week to explain what he intended to do about the chaos on Wall Street, he must have wished he’d stuck to his research in the hushed corridors of Princeton.

Dodd reassured the public that Bernanke had promised to use ‘all tools available’ to tackle the crisis. As an exercise in soothing frayed nerves, the charm offensive seems to have worked; by the end of the week, with help from another shot of cheap money from the European Central Bank (ECB), the short-term squeeze in the money markets was showing signs of easing.

Back in the real world, US is in the grip of a housing crash (that’s where it all started, remember?). Bernanke has come under political pressure not just because an army of chino-wearing hedgies have made bad bets (who cares?), but because tens of thousands of families are threatened with losing their homes. Forecasters believe as many as two million households could default, and that prices are likely to fall by up to 10% — a plunge that would represent the US property market’s worst crash since the Great Depression.

For Bernanke, the market madness is only one part of a very nasty loop. The housing downturn has hit the financial markets as bad loans have gone sour, but the resulting credit crunch, as financial institutions tighten their lending criteria, can only exacerbate the housing crash — and the collateral damage for an already fragile economy.

The Fed made an emergency cut in its discount rate on August 17 because Bernanke feared that what was going on in the markets was dangerous enough to inflict serious pain on the economy. Bernake’s predecessor, Alan Greenspan, bears some blame. Even before Bernanke arrived at the Fed, Greenspan’s critics warned that ‘the maestro’ had wilfully pumped up an almighty bubble in the housing market to mitigate the collapse of another bubble — in overhyped, overpriced dotcom shares. Greenspan slashed rates to an extraordinary one per cent and home-buyers duly responded to his signal by piling into the housing market.

Bubbles are hard to spot, except with hindsight, and even harder to deflate with the blunt instrument of the interest rate, but perhaps their potential consequences are so serious that policymakers should be able to take more account of them.

When George Bush chose Bernanke for the Fed job, Joe Stiglitz, Nobel-winning economist and fly in the White House ointment, told The Observer that the legacy of the Greenspan bubble might take up to a decade to dissipate. “The consequences of economic mistakes take five to 10 years to play out,” he said, predicting, at best, a long period of the “malaise economy”. Hedgies may feel calmer after a few injections of central bank cash, but for Americans on Main Street, the malaise is likely to be measured not in tumultuous weeks, but a tough few years. — The Guardian