Bernanke grapples with Greenspan as Volcker scorns Fed bailouts

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Apr 21: told the press.

At a press briefing in Miami on April 7, Paulson said the plan -- which would abolish the Securities and Exchange Commission -- may take several years to implement, and the Democrats, who control Congress, say no quick action is likely. Even so, Bernanke's Fed has already grabbed some of the power the Treasury proposes to give it by inserting itself into the back offices of the investment banks.

"Since we've begun lending to dealers, including the remaining investment banks, we have put examiners on the ground in those firms, and we've established off-site teams that coordinate with them,'' Bernanke told Congress's Joint Economic Committee in testimony on April 2. Bernanke, an academic from rural South Carolina, took office in February 2006 in the shadow of former Fed Chairman Alan Greenspan who held sway at the central bank for 18 years. Bernanke, a Republican, is now well on his way to becoming the most powerful Fed chairman ever.

"One interpretation of the Paulson report is that the Fed is handed any authority to do anything it wants,'' says former Fed Governor Lyle Gramley now a Washington-based senior economic adviser for Stanford Group Co., a wealth management firm in Houston. "It assigns the Fed overall responsibility for any financial institutions that might be a source of systemic risk.''

Former Fed Vice Chairman Alan Blinder says Bernanke's actions are justified. Paulson and President George W Bush have done little to address the mortgage crisis, he says. "The Fed has been extremely creative and is fighting this war almost exclusively by itself.''

The Bernanke Fed may have already seized too much power and has abandoned historical principles, says Paul Volcker who was Fed chairman from 1979 to '87. "The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers,'' Volcker, 80, told the Economic Club of New York on April 8. " A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time- honored central bank mantra in times of crisis: lend freely at high rates against good collateral. It tests it to the point of no return.''