Fed’s action ‘lesser of two evils’
What the United States’ Federal Reserve has done - injecting liquidity into the economy and rescuing troubled banks and brokerages - is the ‘lesser of the two evils’, said Minister Mentor Lee Kuan Yew.
The greater evil is if nothing was done as it would trigger a ‘real worldwide credit crunch and confidence crisis’.
The result would be a worldwide recession which might be very difficult to reverse, he added.
Mr Lee was asked, during an interview with Bloomberg News last Tuesday, whether he agreed with the Fed’s measures to help ease the credit turmoil.
These include taking over sub-prime and other collateral debt obligations and helping troubled banks and brokerages to get back on their feet.
In March, the Fed invoked an emergency rule to lend to Bear Stearns, once the fifth-biggest US securities company, to stave off bankruptcy. It also opened up lending to investment banks.
These were moves that ‘not everyone in America agrees with’, Mr Lee conceded.
There is a risk, he said. ‘If you increase liquidity and run the risk of higher inflation, then you will postpone the problem, perhaps to a later date, when it may become more complicated or easier to resolve. We’re not sure.’
But, he said: ‘To do nothing is surely to run into a gridlock.’
If people lose confidence in the system, so too will the banks, he said. ‘The system will seize up, and we get a 1930 crisis.’
Source : Straits Times - 7 May 2008
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