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 Bernanke – all in the name of seeking to halt the panic sweeping financial markets – are turning it into a financial colossus. They're also putting the government deeper in debt and taxpayers further at risk if the various moves fail.
And it's 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 it will 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 day-to-day 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.
“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. You cannot criticize this Fed for trying to do something about a crisis which has basically shut the flow of credit down to a trickle and poses a threat to the economy,” Jones said.
Wall Street was not yet impressed. The Dow Jones industrials sank an additional 508 points.
Bernanke told a meeting of business economists that the private sector should address market upheavals when possible – but that “in those cases when financial stability is threatened … intervention to protect the public interest may well be justified.”
“So long as financial conditions warrant, we will continue to look for ways to reduce funding pressures in key markets,” he said, opening the door wider to an interest rate cut on or before the Fed's Oct. 28-29 meeting.
The Fed is largely free from constraints that bog down other policymakers. Also, it is the only U.S. institution with the ability to create money out of thin air. But that can be inflationary, and the Fed must be careful to separate its powers of raising or lowering the nation's money supply from the financing of the new bailout programs.
The Treasury Department will provide the money for the loans, funneled through the New York Federal Reserve, for the programs announced by the Fed on Monday and Tuesday.
Congress created the Federal Reserve in 1913 to prevent financial panics such as runs on banks. Its powers were expanded in 1933 and 1935. Although its members are nominated by the president and confirmed by the Senate, and it is subject to congressional oversight, its decisions do not have to be ratified by either the president or Congress.