Bail Out Ben

It's up to Congress, not the Fed boss, to regulate financial markets.

IT HAS BEEN about four months since the Federal Reserve orchestrated a bailout of the Wall Street investment firm Bear Stearns. The action was unprecedented: Invoking rarely used emergency powers, the Fed put billions of taxpayer dollars at risk to stop the meltdown of a non-bank that it did not regulate. It did so in a series of harried weekend phone calls, with no specific approval from Congress. Given the risk of potentially catastrophic fallout for the global economy, the unorthodox move was probably justified. But the Bear Stearns rescue continues to raise questions: Has the government now assumed responsibility for the stability of all investment banks? And if so, by what legal authority, and on what terms?

On Tuesday, Fed Chairman Ben S. Bernanke showed that he is not exactly plagued by second thoughts. First, Mr. Bernanke said that the Fed may well continue to make emergency funding available to other investment banks beyond September, the previous deadline. Second, he said that the Fed and the Securities and Exchange Commission have reached a written agreement that will give the Fed access to the investment banks' internal financial data until further notice. In short, he both extended the Fed's support for investment banks and expanded its oversight of them. The goal, logically enough, is to avoid a situation in which the investment banks can use the Fed's money -- without the Fed being able to attach any strings. That could lead to excessive risk-taking or, as Mr. Bernanke more delicately put it, "make market discipline less effective in the future."

Mr. Bernanke clearly feels that he has to improvise as long as the financial system is still shaky and Congress does not fill the legal vacuum. Indeed, he pressed ahead even after Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and the committee's ranking Republican, Richard C. Shelby (Ala.), asked him not to. Perhaps Mr. Bernanke, like many other people, doubts Congress's ability to write new rules in what's left of this election year.

Yet Congress must act, and sooner rather than later; it's encouraging that the House Financial Services Committee will hold hearings today, with Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. as witnesses. The Fed is supposed to be the independent guardian of the dollar's value, not a fourth branch of government for financial policy. The direct support for and supervision of Wall Street, absent clearer statutory authority, risk politicizing the Fed.

To be sure, Mr. Bernanke himself had several suggestions, including a new Fed authority to supervise "systemically important" transactions by clearing banks and a new system for liquidating troubled investment firms, possibly modeled on the Federal Deposit Insurance Corp.'s powers over insolvent banks. Neither idea is without its drawbacks, as Mr. Bernanke recognized. Depending on how it's designed, a permanent safety net under investment banks might simply encourage them to take even more undue risks. Ultimately, how much to regulate the financial markets and how much taxpayer money to risk on bailing them out are political questions, not technical or economic ones. Mr. Bernanke has done a good job at crisis management so far. But he is neither uniquely qualified nor constitutionally authorized to build the permanent new regulatory structure that the financial markets need.