Seeing a Systemic Risk in the Fed Itself

Members of both parties back limits on agency’s powers

By Joe Adler and Stacy Kaper


The Federal Reserve Board’s extensive use of emergency powers to prop up nonbanks and launch liquidity programs may have saved the nation from economic collapse, but some in Congress say the central bank has too much power. House Republicans unveiled a plan last week that would ban the Fed from using its authority to act in “exigent and unusual circumstances” to help an individual company like American International Group Inc. and give Congress the chance to block any broader actions. Though House Financial Services Committee Chairman Barney Frank did not specifically endorse that approach, he did signal a willingness to rein in the Fed’s power in an interview last week. Whether Congress will ultimately change anything remains unclear, but there is a debate under way: Has the Fed stretched its authority too far, and would restrictive changes hamstring it in a future crisis? “Even the Fed and certainly several of the Federal Reserve Bank presidents have had deep misgivings about the programs that have been used under 13(3),” said Karen Shaw Petrou, managing director of Federal Financial Analytics Inc. Fed Chairman Ben Bernanke “is a strong proponent of aggressive central bank intervention, but much of what he’s done has gone beyond the typical central bank role, and I know that many in the Fed think this needs a rethink.”