October 7, 2008 Fed takes historic step, seeks to free up credit Play video

(NECN: Peter Howe) - It has been another gloomy day, in which the Federal Reserve chairman offered a dark forecast on the nation's economy.

Another day, another extraordinary and unprecedented action by the Federal Reserve to prop up the nation's financial systems. The Fed is expanding its emergency lending program to buy so-called commercial paper, the $1.6 trillion worth of short-term notes countless U.S. businesses use to make payroll and cover bills.

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Boston University business professor Mark Williams used to work for the Fed as a bank examiner in Boston and San Francisco.

"It speaks to the severity of the market," says Williams.

It is also just the latest of a string of never-before seen moves by the Fed in the last nine months. Besides buying commercial paper, the Fed has begun offering emergency loans to investment banks, paying interest to banks for overnight deposits and agreed to turn Goldman Sachs and Morgan Stanley, once high flying investment banks, into commercial banks.

That means, they are subject to closer regulation and have to keep more money on hand.

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College business professor Peter Cohan says unlike the $700 billion Wall Street bailout, this Fed move has immediately lowered interest rates and gotten commercial paper moving again.