"Had the Fed moved more quickly, it could have been a stitch in time that saved" Bear Stearns, he says.

Others, including Alan Greenspan, the former Fed chairman, think that the Fed has allowed itself to be stretched too far beyond its dual mandate of promoting growth and stable prices.

"What we should not have is the central bank involved in its balance sheet," Greenspan said on CNBC last week. "If you allow major fluctuations in [the monetary] base as a result of other-than-monetary-policy reasons, I think you're taking undue risks with the notion of the stability of the financial system and very specifically the Fed's control of inflation."
 
But the Fed's defenders argue that it would have taken ESP-like foresight for regulators to figure out that disaster was looming.
 
"Under the circumstances, they've done about as well as you could expect," say New York University economist Mark Gertler, who has co-authored with Bernanke a number of papers on the Depression.
 
The Bear rescue will be debated for some time to come, but at least the markets were once again relatively calmed. The fallout from the subprime mess, however, had by then started to show up in government figures.
 
Economic growth fell from a strong 4.9 percent in the third quarter to 0.6 percent in the next, and employers began cutting more jobs than they were creating in January. (Growth figures were later revised to 4.8 percent and -0.2 percent, respectively.)
 
Rising energy and food prices, meanwhile, meant the Fed had to be careful not to stoke inflation with its rate cuts. As oil surged 50 percent between February and May, the Fed chose to keep rates steady after lowering them 3.25 percent since September.
 
Before the year was out, the Fed had to get creative again, this time assisting the Treasury Department in preventing a collapse of Fannie Mae and Freddie Mac, the government-sponsored entities that were party to close to half of the mortgages in the United States. The Fed's role in the Fannie-Freddie bailout—providing access to liquidity—by now seemed like old hat.
 
The Fed's travails over the past year highlight the fact that the financial regulatory system in the U.S. was designed to deal with the risks associated with commercial banks, not investment banks or other non-depository institutions.
 
"In very short order," Gertler says, "the Fed had to redesign the system to deal with these institutions."
 
The next major task for the Fed, and the next president, will be to figure out which of the new tools should be kept around and which should be discarded.
 
But in doing so, the Fed has to avoid creating the sort of implicit guarantees that created the type of investor behavior that has brought down Fannie and Freddie.
 
"The backstop is now established," says Gault of Global Insight, "and even if things were to calm down so much that the backstop could be removed, the very fact that it's been instituted once means that at any point in the future it could be brought back."