The Fed was started in 1913 through the Federal Reserve Act to stabilize the financial system after a series of financial panics -- in 1873, 1893, and 1907. It was modeled after the German central bank -- and established a system of fifteen regional central banks whose actions would be coordinated by a national board of commercial bankers -- making emergency loans to member banks, creating money to provide an elastic currency, and acting as fiscal agents for the U.S. government.

The Fed's establishment was opposed by populists who feared that a central bank would favor Wall Street interests over those of the general public. I find this history interesting because the political forces arrayed around the Fed are not too different than they were almost a century ago. Despite the creation of the Fed, we still have financial panics such as the one that led the Fed to cut rates by 50 basis points yesterday.

I am now wondering whether the Fed is really the right system for a globally interconnected financial system where split second decisions made by powerful computers can throw the financial markets in a tailspin. It seems to me that the current system has many flaws:

• It does not have enough tools at its disposal to fix panics in the global financial markets. For instance, cutting the Discount Rate and Fed Funds rates are not likely to fix the problems created by the current financial panic.
• The costs of mistakes by big investors get shifted to government while small investors must bear all the pain themselves. Thus the Fed runs the risk of bailing out big investors due to political pressure. The lower rates used to bail them out could cause inflation to get out of control.
• Hundreds of billions worth of collateral -- such as asset-backed securities -- used to back bank loans are not accurately valued in real-time. This makes it impossible for the Fed to monitor accurately the money supply
• Different countries in which U.S. investors operate have their own regulatory mechanisms which may impede the Fed's goals

While I don't have an easy answer to how to fix these weaknesses, I am curious what you think about Stewart's question to Greenspan. Do you agree that we should have a Fed? If so, what should it do?

Meanwhile, I commend Greenspan and Stewart for making a sober subject funny.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.