Bernanke Tries to Define What Institutions Fed Could Let Fail

Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes.

In the year since credit markets seized up, the 54-year- old Federal Reserve chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac.

The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.

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To ``a large degree,'' it appears the Fed `` is going to become a major regulator of financial institutions,'' says Ross Levine, a Brown University economist who has written a book on bank regulation.

With that comes the danger that measures the Fed has to take to enhance stability may end up restraining economic growth, Levine says. ``That can come at a very big cost to innovation and the welfare of the country,'' he says.