In politics and on the campaign trail, flip-flops can be very damaging. But Ben Bernanke's whopper of a policy flip-flop two months ago turned out to be a big positive for financial markets and the economy, and may even help reverse the sinking fortunes of the GOP.

The flip-flop itself is a tale of two Bernanke's: On the afternoon of Aug. 7, the Federal Reserve chair was an inflation hawk -- according to the unchanged FOMC policy statement -- fearful of adding liquidity to the markets. By day's end on Aug. 9, however, he was leading the liquidity charge, initiating a process that would help unlock the credit seize-up that started in late-July.

Why the 180?

Using the Freedom of Information Act, Ken Thomas, researcher and lecturer at the University of Pennsylvania's Wharton school, was able to get Bernanke's calendar of phone calls and meetings at the time the flip-flop occurred. He found that a day after the Fed's Aug. 7 decision to keep rates steady and maintain a focus on inflation worries, Bernanke received a phone call from Citigroup's Robert Rubin, the Wall Street powerhouse and former Clinton treasury secretary. Thomas does not know the content of the Rubin call, but subsequent calls and events suggest that Bernanke rapidly changed his mind on Aug. 8 and 9, after which he began steering the Fed toward a series of massive money additions to the banking system.

According to the Bernanke logs, a 5 p.m. Rubin call on Aug. 8 was followed by a 7:30 a.m. next-day breakfast with Bush Treasury man Henry Paulson and an 11 a.m. meeting with legendary mortgage expert Lou Ranieri. (It was Ranieri who pioneered mortgage-backed securitizations, the very bonds that were collapsing as a result of the subprime mortgage virus that had already begun infecting the financial system.) At 2 p.m. that day, the Fed chair met with Ray Dalio, head of Bridgewater, the fourth-largest U.S. hedge fund, along with other hedge-fund magnates. At 4:30 p.m., Bernanke was on a conference call with his fellow FOMC members, undoubtedly to discuss a Fed change of heart.

In fact, over the next few weeks, Bernanke participated in no fewer than 35 separate conference calls with fellow Fed operatives -- a complete departure from his earlier no-conference-call style. And he got the liquidity ball rolling. As we now know, the Fed started pouring liquidity into the system on Aug. 9. Then, on Aug. 17, it slashed its base discount rate for member-bank loans by 50 basis points. Finally, on Sept.18, it enacted a shock-and-awe liquidity-adding half-point drop in the federal funds rate.

The Bernanke narrative is based on the incidence of calls and meetings, and not the actual content. But it seems clear that Rubin started a chain reaction on Aug. 8 -- only one day after the Fed's disappointing, hold-the line policy decision that so disappointed financial markets and intensified the credit turmoil. Continued...