U.S. Stock Market is in a Fed Fueled Bubble
Stock-Markets / Stock Markets 2012 May 02, 2012 - 11:17 AM GMTBy: Bloomberg
Harvard economics professor Martin Feldstein spoke to Bloomberg Television's Sara Eisen this morning, saying that the real danger to the U.S. economy is that "this is a bubble in the stock market created by low long-term interest rates that the Fed has engineered."
Feldstein on the U.S. economy:
"We are not doing very well. The economy is just coming along at a snail's pace. The first quarter numbers that we just got last week were not very good at all. The GDP number was 2.2%. That was a disappointment, but you know, it was all automobiles. 1.6 out of the 2.2 was motor vehicle production. So, people were catching up after not being able to buy them the year before. So, this is a very weak economy. The payroll employment numbers, we are going to get some new ones in April. Let's hope they are better than March where it fell by half. The stock market is, I think, responding to the Fed. I think the real danger is that this is a bubble in the stock market created by low long-term interest rates that the Fed has engineered."
On the danger of a bubble in the stock market:
"The danger is, like all bubbles, they burst at some point. Remember, Ben Bernanke told us in the summer of 2010 that he was going to do QE2 and then ultimately they did Operation Twist. The purpose of that was to make long-term bonds less attractive so that investors would buy into the stock market. That would raise wealth and higher wealth would lead to more consumption. It helped in the fourth quarter of 2010 and maybe that is what is helping to drive consumption during the first quarter of this year. But the danger is you get a market that is not with the reality of what is happening in the economy, which is, as I said a moment ago, is really not very good at all."
On whether another recession is on the horizon:
"Anything I say is telling my views and nothing to do with the NBR's business cycle dating committee. A recession is still a low probability, but there are a number of negatives out there. The economy is slow and weak. Then you add to that fact that Europe is sliding into recession. That is going to hurt our exports. You add to that the risk that the end of this year in there is a very large fiscal cliff, that is $5 trillion tax increase next year if new legislation is not passed. Nobody wants to see that happen, but it is a dangerous game of chicken that could happen after the election. So, I think that is something anybody who is thinking about investing, whether it is in the stock market or a business thinking about investing, has to ask, if that happens, if we are going to see that jump in taxes, that is going to push the economy next year into a serious recession."
bloomberg.com
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