Federal Reserve extends reach with 1930s powers
WASHINGTON - Dusting off Depression-era emergency powers, the Federal Reserve is extending its reach over the economy as never before, pushing the limits of its authority, if not exceeding them.
WASHINGTON - Dusting off Depression-era emergency powers, the Federal Reserve is extending its reach over the economy as never before, pushing the limits of its authority, if not exceeding them.
Now the nation's central bank is even becoming a source of loans for companies other than banks.
Radical steps by the Fed under Chairman Ben S. Bernanke - all in the name of seeking to halt the panic sweeping financial markets - are turning it into a financial colossus. They are also putting the government deeper into debt and taxpayers further at risk if the various moves fail.
And it is being done with little direct interaction with Capitol Hill. The Fed does not depend on Congress for its budget, including its payroll, and is as much a creature of the nation's banking system as part of the federal government.
On Tuesday, the Fed announced that it would buy vast amounts of corporate debt, some of it unsecured, in hopes of renewing the flow of money in so-called commercial-paper markets. That is where many companies turn for short-term loans to finance their most basic operations, such as purchasing supplies or making payrolls.
That action came just a day after the Fed increased a short-term loan program to as much as $900 billion by the end of the year - exceeding even the government's $700 billion bailout plan enacted Friday.
And yesterday, the Fed and other leading central banks cut rates in the hope that credit markets would soon ease.
"Almost every day there's a new program. It's almost Rooseveltian, if that's a word," said David Jones, chief economist at DMJ Advisors in Denver and a longtime Fed watcher. He was referring to bold federal programs undertaken by President Franklin D. Roosevelt in the 1930s to battle the Great Depression.
"Certainly, the Fed is pressing against the bounds of its territory as the central bank. But we got into the Depression precisely because the Fed then stood by and watched most of the banking system fail, watched the money supply contract by a third, and did nothing about it," Jones said.
Bernanke on Tuesday defended the Fed's steps, along with the huge separate bailout program to allow the government to take over hard-to-sell mortgage-related securities clogging bank balance sheets.
The Bernanke Fed has its critics. Former Chairman Paul Volcker has said it has been acting "at the limits" of its legal authority.
Edwin M. Truman, a former Fed economist now with the Peterson Institute for International Economics in Washington, said that while some might question the Fed's recent straying from bank regulation and monetary policy, the authority it is now invoking was expressly given to it by Congress in 1935 "rather than to Treasury. And there's considerable congressional oversight."
"There aren't any magic bullets. At one level, we collectively are going to just have to work our way through this thing. We hope without too much damage," Truman said.
