A revolution at the Federal Reserve

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more: http://www.msnbc.msn.com/id/23744751/

A revolution at the Federal Reserve
Bernanke reinvents central bank to avoid catastrophe 4/21/08

By Michael Mandel and Peter Coy

updated 2 hours, 25 minutes ago
The current financial crisis—perhaps the biggest since the Great Depression—has turned Federal Reserve Chairman Ben Bernanke into a reluctant revolutionary. The quiet academic who wanted to make the post of Fed chairman less heroic is leading a dramatic expansion of the central bank's role. In the process, he is setting the stage for the next big boom—or bubble.

In the short run, Bernanke is waging a war to keep the financial markets from collapsing. The biggest move so far: On Sunday, Mar. 16, the Fed brokered the fire sale of troubled investment bank Bear Stearns to JPMorgan Chase and announced that it would be willing to lend directly to major Wall Street brokers, which have never before had access to loans from the central bank.

The two moves represented a new level of direct Fed involvement in the financial markets and made it clear that Bernanke would take any step needed to prevent a financial catastrophe. These maneuvers should work, says Julian Jessop, chief international economist of London-based research firm Capital Economics. "At the end of the day, the Fed can provide a lot of support," he says. "It certainly won't prevent a sharp downturn, but it should prevent a debt deflation spiral."