Fed's Role in Crisis Is Giant, if Opaque

The Fed can essentially expand its balance sheet at will, reflecting its power to create money. Congress gave it even more leeway to do so in the bill that contained the $700 billion rescue package, by allowing the Fed to pay interest on bank reserves.

"People want to act like the Fed's balance sheet is limited," said Diane Swonk, chief economist at Mesirow Financial. "No, it's not. It's pretty much unlimited."

The Fed's lending achieves some -- but only some -- of the goals of the Treasury Department's original financial rescue plan. The Troubled Asset Relief Program, which is now focused on investing money in banks, was originally intended to focus on the purchase of mortgage-backed securities.

Although not purchasing such securities, the Fed has agreed to take them on as collateral. That has helped banks get access to cash. But banks are still exposed to further losses if the value of those assets continues to decline. And the lending is not jump-starting the market by serving as a buyer of last resort, which would be the goal of government purchases.

"It's kind of like TARP light," said Michael J. Feroli, an economist at J.P. Morgan Chase.

By expanding its lending, the Fed is engaging in a form of economic stimulus known as "quantitative easing," which is a way for a central bank to try to fuel growth even when it has cut short-term interest rates to nearly zero.

Fed Vice Chairman Donald L. Kohn acknowledged publicly last week that that is what the central bank is doing. Behind closed doors, Fed leaders are considering other ways they can spur economic growth beyond cutting their target for interest rates. (The federal funds rate, at which banks lend to each other, is currently 1 percent, and analysts widely expect it to be cut to a half-percent at the Fed's December policymaking meeting.)

Perhaps the most promising option would be for the Fed to start buying the debt of Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies. Such a move would also be expected to reduce mortgage rates.

The Fed has consistently rejected requests to disclose more information about which assets it is taking as collateral for its lending programs. Bloomberg News sued under the Freedom of Information Act this month, requesting the information; the Fed refused, responding that the information was protected because it is confidential commercial information, and because it is being kept by the Federal Reserve Bank of New York, which it argues is not subject to FOIA.

At a hearing last week, Rep. Spencer Bachus (R-Ala.) asked Bernanke: "When do you anticipate letting the public know" what assets you're taking? Bernanke then argued that disclosure would be counterproductive -- his answer, in effect, being never.

There is some reason for the Fed to keep quiet, said Shulman, of UCLA.

In 1932, Shulman said, Congress demanded that the Reconstruction Finance Corp., a program that lent money to banks to try to contain the Great Depression, publish a list of who was getting public funds. As a result, there was a run on those banks.

"Congress should be careful what it asks for," Shulman said.