These are extraordinary times. One after another, the giants of the American financial system are foundering: Bear Stearns, Freddie and Fannie, Lehman Brothers, AIG, Washington Mutual. Morgan Stanley seems likely to merge with another bank to shore up its finances—as Merrill Lynch has already done.

Holding back the tide, or trying to, is the Federal Reserve. Or, specifically, Ben Bernanke, the chairman. And as both the New York Times and Washington Post report today, Bernanke’s awesome power is making lawmakers on Capitol Hill uncomfortable.

The concern mainly stems from the Fed’s move over the weekend to essentially seize control of AIG. It was an unprecedented act for the Fed – to move beyond lender as last resort to actual investor. As NYU economics professor Nouriel Roubini (aka “Dr. Doom”) puts it, “The U.S. government is now the largest insurance company in the world.”

The Fed acquired 80 percent of AIG in exchange for lending it $85 billion. Fed officials say they don’t plan to get their hands dirty with AIG’s holdings. But according to the Times, “If the company’s new executive cannot fix its problems quickly, Fed officials might need to get more directly involved. That could make them tantamount to real estate investors and hedge fund managers at the same time.”

Lawmakers, who complain that they’ve been left on the sidelines while the Fed has made these historic decisions, think it’s time that ground rules be set:

“He can make any loan he wants under any terms to any entity or individual in America that he thinks is economically justified,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee.

“I asked the chairman if he had $85 billion to bestow in this way. He said ‘I have $800 billion.’ ”

“No one in a democracy unelected should have $800 billion to dispense as he sees fit,” Mr. Frank said.

Actually, according to the Times, the Fed’s reserves have actually been depleted far below that $800 billion number. The Fed held about $800 billion in Treasury securities last summer, the Times reports, a number that’s dwindled to around $300 billion – which is why “the Treasury Department sold tens of billions of dollars of special “supplementary” Treasury bills on Wednesday to provide the Fed with extra cash.”

One leading proposal on Capitol Hill to set ground rules, the Post reports, is “the creation of a new federal entity that would acquire ‘toxic’ mortgage-backed assets from failing firms and hold them until the housing market improves…. Setting up such an entity also would give lawmakers a chance to determine the parameters of future bailouts, as opposed to leaving the decision in Bernanke’s hands.”

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