The Fed has always been the “Lender of Last Resort” to commercial banks needing emergency financing. They began providing this service to Wall Street firms this year as well. They even expanded their influence to become the “Buyer of Last Resort” when they opened their term lending facility and allowed firms to drop their worthless financial toxic waste products there as “collateral”.

But when the Fed sat on their thumbs last Wednesday, the markets vomited blood all day on Thursday. Bernanke and Co. basically admitted something that anyone with a brain has known for a while now: They CAN’T stop the various crises we are in through interest rate manipulation. They have the power to heat up or cool off the bulk economy through their machinations, but that’s it. Monetary policy can’t directly address many problems we face, including housing, credit woes, and the current “kick-to-the-nuts” pricing in oil.

So what could the Fed do? Well, Ben could break out his helicopter and start dropping oil barrels from the sky:

No, not real ones–paper ones. After all, the Fed is great with paper assets! The Fed could wade into the international markets and start selling oil futures in size. If not them, they could backstop any number of entities that could do the selling. If index speculators can drive the price up, then the Fed could be (or sponsor) a “Seller of Last Resort” to give them the other side of that trade in spades. If the Fed can take on financial products with zero value, then why not sell the Hell out of oil at these nosebleed levels?

Some oil refineries are actually turning product away due to input prices that are too high. Anyone with an IQ over 75 knows it’s not supply and demand that is operating here. I see the downside for the Fed as very small, but the potential is there to knock the oil speculators back to sub $100/barrel, and blow up their bullshit funds in the process.

Will they actually do this? No way. But it’s an interesting conspiracy theory for a short holiday week, isn’t it?