Fed Weighs Options as Credit Crunch Lingers

Having already bailed out the financial system with its rescue of Bear Stearns (BSC Quote) last month, the Federal Reserve is under pressure to expand its extraordinary encroachment into the markets even further as the credit crisis persists.

But as the Fed wrestles with how best to guide the economy through the credit crunch, calls for a fiscal response from elected officials are growing. While the Fed has not pledged to backstop the flagging mortgage market, The Wall Street Journal reported Wednesday that internal discussions are already under way at the central bank about contingency plans for expanding its lending power should the crisis continue and get worse.

"It would be a big mistake for the Fed to backstop the mortgage market," says Nouriel Roubini, an economics professor at New York University and chairman of RGE Monitor. "It's a case for fiscal policy to consider whether to nationalize a big chunk of mortgages. There likely would be a huge fiscal cost to this, so it's an issue of spending and taxation, and having the Fed do that is inappropriate and reckless." ...