WASHINGTON (MarketWatch) — The Fed does what it wants and plays favorites. And as a result it’s lost the trust of the American people.

That is the stark view the central bank’s actions in the wake of the financial crisis by Lawrence Jacobs, a public policy expert at the University of Minnesota.

In a new book, “Fed Power, How Finance Wins,” Jacobs, and his co-author Desmond King from Oxford University, lay out their case that the Fed managed to overstep the U.S. constitution by taking giving trillions of dollars in loans to financial market participants. These actions should have been reserved for Congress and offended Main Street, he said. “Elites” in Washington and New York went along with the central bank’s actions believing basically the ends justified the means, they argue.

In an interview with MarketWatch, Jacobs said reform of the Fed’s 100-year old structure is now inevitable, whoever wins the White House.

Jacobs also said the Fed should to get out of the business of regulating Wall Street. At the moment, the Fed is overpromising what it can do to ward off the next financial crisis and Washington’s alphabet-soup of financial regulators must be simplified. A single financial regulator, modeled after Canada’s Office of the Superintendent of Financial Institutions, is the way to go, he said.

The following interview has been edited lightly for clarity.

MarketWatch: You argue the Fed has lost some of its legitimacy and credibility. That’s a big deal for the Fed. Can you explain what you mean?

Jacobs: Everything that I’ve read and studied and analyzed leads me to believe that there is tremendous public doubt and that it has lingered past the initial skepticism about what the Federal Reserve has done [in the crisis.] The issues about the Fed and its credibility are no longer just being questioned by libertarian [Rep.] Ron Paul in the House. It enjoys much wider scrutiny throughout Congress and, among the attentive public. The benefit of the doubt has been lost.

MarketWatch: And that’s because the people view the Fed as not accountable?

Jacobs: I think there are two sources of this decline in the credibility of the Fed. One is a sense that the Fed is unmoored from our system of democratic accountability. It does what it wants. And the second corrosive perception that is now widespread is that the Fed plays favorites. The facilities that it created were tremendous in their scope and they selectively provided benefits of credit during a credit freeze to a small number of banks and non-banks. Meanwhile, Main Street and millions of homeowners were faced with real duress or bankruptcy or foreclosure.

MarketWatch: Should the Fed just not have bailed out Bear Stearns? Is that where things started to go bad?

Jacobs: I think the issue is how the Fed prosecuted that effort. So I think the issue with Bear Stearns is partly what it did for Bear Stearns and it is also partly its orientation, towards the Bear Stearns towards [American International Group] and the other kind of financial markets and a blind eye to homeowners.

MarketWatch: Congress and the White House could have done things to help homeowners and they didn’t, so why is it the Fed’s job?

Jacobs: It is certainly the case that Congress fell down on the job. But partly it is because the Fed has stepped into what used to be the normal arena of fiscal policy. The Fed has kind of crowded out the constitutional authority and responsibilities of Congress. If the Fed wasn’t doing this, and it fell to Congress, Congress would absolutely step up, because it would have had no choice. But when the Fed steps in, it kind of gives an out to Congress to do its job. I think, in general, the movement of the Fed into fiscal policy is unsustainable. It far exceeds the Fed’s constitutional responsibility and it has brought upon itself this kind of erosion in trust and legitimacy.

MarketWatch: But Congress was happy the Fed was around to take the tough actions and later Congress can just beat the Fed up.

Jacobs: I think there is absolute truth to that. But, you know, take any number of areas where Congress would be glad to have another institution take responsibility and then blame them. Should we have the president or maybe even the Fed making decisions on appropriations and spending? No, we have a constitutional system that apportions responsibility, and it is up to Congress to do its job. If Congress is not going to do the job then the blame falls on Congress. It is not up to the Fed to step in and start using this authority that it does not have. When it does that, it exposes itself to the kind of fear and doubt that we now are seeing in greater abundance than we have in the past.

MarketWatch: Some people argue that when Treasury Secretary Henry Paulson called Bernanke and said the administration was thinking about doing a bank bailout, Bernanke should have said – “I can’t go up to Congress with you. This is not my fight.” That would have been better?

Jacobs: I’m not taking issue with TARP. I think there are issues with TARP that we talk about in the book. It is more the facilities that were created in 2007-2010 which apparently very few, if any, in Congress knew about. It was not authorized. And it was just a kind of “we’re going to go it alone and make claims on 13(3) to justify it.” TARP falls into the kind of presentation clause. This is the legislative process by which you get laws past. What the Fed did beyond TARP is the problem.

MarketWatch: Really? I thought the loans and the lending facilities that the Fed created were what a central bank is supposed to do when markets freeze up. The Fed stepped in and kept the system working. No question Congress was surprised. But was that insider dealing?

Jacobs: There are two issues here. One is the Fed did this alone. While the Fed acting independently, without any input or even knowledge of Congress or the President, may seem fine to those on the Fed – it is absolutely is not fine with a lot of people in America. When you listen to the presidential campaign debates in both parties and you hear tell-tale signs of that. When Ted Cruz talks about philosopher kings at the Fed, this is what he’s referring to. When you hear people like Rand Paul to Bernie Sanders talking about auditing the Fed, that is what they are talking about. The second issue is the sense of favoritism.

MarketWatch: Let’s go back to the first issue.You are saying people view the Fed being able to do what it wants with no political checks and balances.

Jacobs: Exactly. I think to me the telling comparison here is with Mervyn King, who was the governor of the Bank of England. He too put together rescues. Not identical, but similar in their broad scope. What the Bank of England did was it attached conditions. Among the conditions it attached for banks and non-banks that got credit in the time of a credit freeze was that they would turn around and offer assistance to households that were faced with foreclosure and businesses faced with bankruptcy. And later, when King was testifying to Parliament, he was asked “Why did you do this.” And he said “I knew I would be here someday. And I knew that you would expect me to do it.”

Also read:Here’s Mervyn King’s plan to rescue global economy

Now the Fed doesn’t feel that way, because it is on its own. That’s the problem that you’re hearing a growing number of lawmakers expressing and that among Americans who track these issues you hear expressed and it is part of this general gestalt of distrusting Washington.

MarketWatch: Shouldn’t Treasury have put in those conditions?

Jacobs: The way Paulson proceeded with TARP that absolutely fits our system of accountability. But it was the facilities that were created from 2007-2010 that were far beyond the authority that was expected to be exercised by the Federal Reserve.

MarketWatch: So how would you reform the Fed?

Jacobs: We’ve proposed three broad areas of change. One that I think is now gaining credibility is that public authority ought to follow the public commitment of resources. And so you’re hearing legislation in Congress about making the president of the New York Fed a presidential appointment subject to Senate approval. You’re hearing a growing number of people talking about subjecting the board members of the 12 regional Fed banks to greater scrutiny. Right now you have two-thirds of controlled by private banks and the question is how can we rebalance that? So that is one area.

The second area is pulling the Fed back from regulatory policy. And if you look at other central banks, particularly the Bank of Canada, they have a more limited set of responsibilities and regulatory policies. And the third area, and I think this area reflects some of the concerns which I think are legitimate in the Fed and the financial community which is the current arrangement means that America will not have an effective financial responder when we get hit again by a crisis. The FSOC has 10 agencies involved in that. And there is absolute certainty from what we know about American administration and regulation: that many cooks in the kitchen will almost certainly slow things down or maybe prevent the kind of decisive action that will be needed when America gets hit by a financial crisis.

MarketWatch: In your book, you put forward the Canadian model of regulation as the paradigm. The Canadian government enacted those reforms in the 1980s. Can’t the failure be traced to the U.S. Congress and not the Fed?

Jacobs: I absolutely agree with you. I don’t think the Fed has necessarily been the bad guys and Congress has been the victim here. But I do think Congress has responded in a way that has now put itself in the hot seat. It is the one that is now subject to this backlash and its powers are now the ones that are under question and its role is under question.

MarketWatch: In England, they had gone away from the Bank of England regulating banks, but now they’ve reversed course and given the central bank more regulatory power. Why isn’t that model best?

Jacobs: The U.K. approach is a very, very different approach than Dodd-Frank.. The current [U.S.] approach is to dissipate authority over federal regulation. I think that’s a big mistake. It is an absolute certainty that if you spread out and fragment authority over financial regulation, it is going to be very difficult to respond and difficult to respond in a crisis. Instead we need to concentrate that authority but concentrate it in a sensible way with a coordinated regulatory system. Canada has some good ideas that we should be looking at.

MarketWatch: The 12 regional Fed bank system needs to be overhauled?

Jacobs: Absolutely. Most thinking people would agree that that has become an anachronism. It made sense in 1913 when we had more regional capital markets. But we’ve moved to international capital markets and the quaint idea of needing to have 12 regional banks so the cash is literally around corner if there is a run — that is kind of laughable. I know that hurts the feelings of a lot of these regional banks but it is also the reality of the 21st century?

MarketWatch: Andrew Levin, a former top adviser to Fed Chairwoman Janet Yellen, has come up with a proposal to reform the Fed. He wants to take the secrecy out of how regional Fed presidents are selected.

Jacobs: I’m generally sympathetic. But I think the part Levin leaves out is this issue of administration authority and structure. This is the kind of thing I’ve studied for decades. What Dodd-Frank has done will have a predictable result. It is going to create institutional rivalry, it will create delay and it is going to create conflict across these different agencies. And if you listen to the response among Fed presidents and other people in the financial markets, they don’t use those words but they share that concern and I think it is legitimate. But I don’t think the reasonable response is to say “you know what we should really do away with Dodd Frank or do away with parts of it.” I think we need a different approach to how we do regulation in America.

MarketWatch: And you think that whoever wins the White House, these issues are going to be front and center?

Jacobs: I would put it this way. I think the Federal Reserve ought to be in the lead on reform. Because it is now in an untenable position. There is an expectation that it is responsible now for preventing these systematic crises. And it simply lacks the authority and the administrative wherewithal to meet that expectation. It is being set up as the fall guy. And the Fed needs to get out of the old way of thinking, which is protect the turf, and into a much more realistic appreciation for the erosion of its credibility and the need to find a new approach for the 21st century.