Who Controls the Federal Reserve?

Rescuing Bear Stearns, offering mortgage-backed securities swaps, holding closed-door meetings with JPMorgan Chase: This is the face of the new Federal Reserve, the lone ranger attempting to solve financial crises when others turn in fright.

So far, few have dared ask a troubling question: Who controls the Fed?

The immediate and long-considered answer is that Chairman Ben Bernanke controls the Fed. But to whom does Mr. Bernanke answer? He faces little plausible resistance from the White House, the Congress, or even the courts. The concentration of power in one agency and its chairman is both troubling and, paradoxically, comforting.

Our federal government is not well structured to handle economic crises. The president and Congress have little direct discretionary authority and are too often left to public posturing. Congress passed, and the president signed, a "stimulus package" ostensibly to help the economy. Sending out checks for a few hundred dollars to voters in 2008 may influence the election more than the economy. Taxpayers will pick up the $200 billion tab.

How many members of Congress knew of Bear Stearns's problems and the Fed's solution before the rest of America? Even if a member had known, would he or she have had either the inclination or the power to do anything about it? Even much of the administration was left in the dark, or perhaps worse, was told what was happening regardless of their views.

Even where it has discretion, Congress will not take needed steps to help mend the underlying economy. It will not discipline tax-and-spend policies, call for an end to crippling regulation, or stand against weakening the dollar.

A generation ago, the Federal Reserve was an obscure government agency. Today, Mr. Bernanke is a widely known public figure. For better or worse, the Fed is filling the vacuum of power and responsibility for the economy. That assertion of power is potentially troubling.

The only entity in America that seems to be consistently tackling the current economic challenge is one that is perhaps not lawfully obligated to do so: the Fed. Some observers believe that the Fed should worry about nothing more than inflation and the strength of the dollar. Mr. Bernanke sees his responsibilities more broadly.

The Fed's power, when it chooses to exercise it, is formidable. Over the past eight months, the Fed has reduced benchmark rates several times, most recently yesterday, and by all appearances it will continue to do so. In recent weeks, the Fed has also been more aggressive operating outside of the normal course of its business. On March 7, the Fed injected hundreds of billions of dollars into the economy by swapping federal bonds for mortgage debt. Last week, the Fed together with JPMorgan Chase provided liquidity to Bear Stearns through a provision of the Federal Reserve Act that has not actively been used since the Great Depression. Over the weekend, the Fed helped negotiate the deal between JPMorgan Chase and Bear Stearns. Now, the Fed offers greater access to credit. In attempting to avert chaos in the financial sector, the Fed has weakened the dollar.

The Fed's exercise of power is problematic. By regulating banks and having the authority to lend money to individual institutions under favorable terms, the Fed's power can potentially be abused. Did the Fed ask JPMorgan Chase for assistance with Bear Stearns, or vice versa? Why did the Fed go to JPMorgan Chase and not another bank? The very questions and many possible answers are troubling.

The president and Congress members will give many public speeches on the economy in the weeks and months ahead. But they will take few practical steps to help the economy. Mr. Bernanke will be meeting in private and negotiating actual outcomes. One can only hope that, for his practically unlimited power, Mr. Bernanke uses it with wise restraint.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.