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Reagan aide warns of bubble, predicts economy will crash

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By Bloomberg News
Sunday, March 31, 2013, 7:51 p.m.
 

WASHINGTON — The 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 on Sunday in the New York Times, 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, caused an “unsustainable bubble.”

“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 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 on Tuesday.

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 rose to an all-time high last week, closing at 1,569.19 on Thursday. That surpassed the previous record of 1,565.15 set in October 2007. U.S. stock markets were closed for Good Friday.

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. “These policies have brought America to an end-stage metastasis. The way out would be so radical it can't happen.”

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