Even More Power for the Fed?

Senate Banking Committee Chairman Chris Dodd says the Federal Reserve already has the authority to act as Resolution Trust Corportation-of-sorts and buy up bad debt:

...Dodd aid the Federal Reserve can act as an "effective Resolution Trust Fund" to buy and dispose of bad debt stemming from the subprime mortgage crisis.

"The Fed has the authority to move in this area,'' Dodd told reporters in Washington today...

"Debating whether or not you're going to set up some new agency or bureaucracy in government is a nice point, but I don't think we have the luxury of waiting another year,'' Dodd said.

Looks like everybody is ready to throw out the legislative rule book. And after today's bloodbath, the Fed has to be seriously considering the option. Economists at Goldman Sachs lay out how the Fed could it:

"...section 14 of the Federal Reserve Act gives it the authority to "purchase and sell in the open market ... cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank."  This could be interpreted to allow the Fed to purchase anything made eligible for discount under the "unusual and exigent circumstances" that have already been declared.  Since loans have been made against commercial paper and equity, these could be viewed as eligible collateral for rediscount which is now eligible for purchase.  In the current environment, the most likely candidates for purchase by the Fed would be mortgage backed securities, paper of financial firms or equity in firms.  However, the Fed's legal authority here is unclear to us and in any case this would be a radical step."