A new, more powerful Fed emerges in crisis

updated 6:25 p.m. ET Oct. 7, 2008

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 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 on 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.

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The Bernanke Fed first invoked rarely used 1930s powers to intervene — with taxpayer backing — in March when it provided a $29 billion loan as part of JPMorgan Chase & Co.'s takeover of Bear Stearns. Since then, it has launched programs to extend loans to nonbank financial companies, to provide backstop insurance for money-market mutual funds and a $85 billion taxpayer-backed loan to bail out American International Group, one of the world's largest insurers.

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 now clogging bank balance sheets.

He 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."

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