Former Federal Reserve Chairman Paul Volcker said the Fed’s independence could be hurt by the wide variety of assets it has taken onto its balance sheet to combat the credit crunch reports the Wall Street Journal.

Since the credit crisis began last August, the Fed has expanded the volume and types of loans it is willing to make to banks and securities dealers — loans that are backed by a wide variety of collateral from subprime mortgages to student loans. It has so far not directly purchased such debt. It did, however, make an unprecedented loan of $29 billion to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co.

Mr. Volcker, testifying on responses to the credit crisis at the Joint Economic Committee of Congress Wednesday, said such activity “has not been the tradition of the central bank and I think that is an issue for the long run for the independence of the central bank. If it is going to be looked to as the rescuer or supporter of a particular section of the market, that is not strictly a monetary function in the way it’s been interpreted in the past.”

Mr. Volcker is credited with reining in surging inflation while Fed chairman from 1979 to 1987. He has since held a variety of private-sector and nonprofit posts and in recent months has been vocal about the need to re-examine the system of financial regulation in the wake of the credit crisis.

Read it here: Fed Balance Sheet Worries Volcker