The Fed rose to the occasion by taking both unprecedented and repugnant measures, such as the bailout of Bear Stearns or of AIG.  It put the Fed in the business of deciding winners and losers, which nobody wanted — least of all, the Fed.  To prevent this from ever happening again, language in the 2010 Dodd-Frank law will only permit loans to a minimum of five firms.  If only four firms are in trouble, they can all go out of business.  It takes five firms to survive.  There are other provisions to limit the powers of the Fed, such as limited collateral types and quality, such a loan term and other constraints.

It is often said that the seeds of the next crisis are buried in the ashes of the last one.

Do we really want to reduce the flexibility of the Fed, our last line of defense against depression and systemic collapse?  Sure, nobody wants the Fed or anybody else picking which companies survive and which that fail.  I applaud the objective . . . but it is not our first objective.

Our first objective during a crisis is to stop it, to prevent it from getting worse, which requires both imagination and flexibility.  Anything that threatens the first objective is nonsensical.  These restrictions on the Fed are nonsensical.  It is like saying the President of the United States cannot commit less than 100,000 troops into any given combat zone.

If we want to get vindictive (and we should), then we should change the law, so we can punish the decision-makers who put us into such a crisis as 2008/9.  We shouldn’t execute an entire firm for the misdeeds of a few executives.