Stockman Warns of Crash Of Fed-Fueled Bubble Economy
By Richard Rubin - Mar 31, 2013 4:42 PM ET
The U.S. economy, fueled by “phony money” from the Federal Reserve’s quantitative easing policies, is headed for an inevitable crash, likely “within a few years,” warned David Stockman, who was budget director for President Ronald Reagan.
In an essay published today in the New York Times (NYT), Stockman wrote that Fed policies in the aftermath of the financial crisis have flooded stock markets with cash even while the “Main Street economy” remains weak. The combination, he wrote, has caused an “unsustainable bubble.”
David Stockman, who was budget director for U.S. President Ronald Reagan, is the author of “The Great Deformation: The Corruption of Capitalism in America,” which will be published April 2. Photographer: Douglas Healey/Bloomberg
“When it bursts, there will be no new round of bailouts like the ones the banks got in 2008,” wrote Stockman, a former senior managing director at Blackstone Group LP (BX) and a former Republican congressman from Michigan. “Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.”
Stockman, 66, is the author of “The Great Deformation: The Corruption of Capitalism in America,” which will be published April 2.
The Fed, led by Ben S. Bernanke, is purchasing $85 billion in assets every month. The Fed is leaving its key interest rate near zero while it tries to reduce unemployment below 6.5 percent and hold inflation below 2.5 percent.
The Standard & Poor’s 500 Index (SPX) rose to an all-time high last week, closing at 1,569.19 on March 28. That surpassed the previous record of 1,565.15 set in October 2007. U.S. stock markets were closed March 29 for the Good Friday holiday.
Among the other culprits Stockman blamed for what he termed a “state-wreck” are President Franklin Delano Roosevelt for weakening the gold standard in 1933, President Richard Nixon for removing the convertibility of dollars to gold and “lapsed hero” Alan Greenspan, the former Fed chairman, for keeping interest rates too low for too long.
Investors will sell, Stockman wrote, at any hint that the Fed is starting to remove assets from its balance sheet.
“Notwithstanding Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making,” he wrote, warning of unsustainable fiscal policies as well. “These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happ