Fed to the Rescue?

Before today, I had never heard of Professor Nouriel Roubini of New York University’s Stern School of Business, who is reported in the story below from the Financial Times. But readers of my blogs over the past few years will have noticed my similar views about the degenerating American economy. And I have previously mentioned the Financial Times of London, available online at http://www.ft.com/world. This paper, together with The Economist and others, have provided more objective reporting than is available in the mainstream American financial press.

One of my readers has pointed out the sharply declining non-borrowed reserves at the Federal Reserve system. I should warn you that I am a generalist in in economic matters, not a specialist on the banking system. But I have long been aware of the developing credit crunch, which is the result of countless bad loans, as mentioned in my blog of January 21 about the Big Time Debt Crisis.

Very briefly, I want to clarify that I agree that the Fed and the American Government must do whatever is needed to prevent widespread bank failures. However, going beyond that in vainly trying to stave off the necessary contraction of the stock market and housing prices would ultimately lead to a worse outcome (as I pointed out on February 4, 2008).

The banking system and the overall economy need a return to disciplined management, not perpetual bail-outs. The time for adolescent behaviour is past. The government and financial system must grow up and take the necessary medicine. This will not be pleasant, but the alternative is unthinkable. We need a return to sanity and sober economic principles. No government should stand in the way of necessary economic corrections. They provide cleansing for the whole system.