Former Reagan Budget Head David Stockman: Fed Has Created Gargantuan Global Bubble

Wednesday, 27 Nov 2013 10:26 AM

By Dan Weil

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The Federal Reserve's quantitative easing program is brewing asset bubbles around the world, says David Stockman, White House budget director under President Ronald Reagan.

The central bank is purchasing $85 billion of Treasurys and mortgage-backed securities a month.

"The Fed is exporting this lunatic policy worldwide," Stockman told CNBC. "Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere."

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In the United States, for example, stock indices have risen to record highs.

The global results of the easing won't be pretty, Stockman says. "It's only a question of time before the central banks lose control, and a panic sets in when people realize that these values are massively overstated," he said.

Foreign central banks are easing "for either good reasons of defending their own . . . trade and their exchange rate, or because they're replicating the Fed's erroneous policies," Stockman said.

He cited the Russell 2000 small-stock index as an example of the mania. "It's trading at 75 times reported trailing earnings. That makes no sense," Stockman said.

To be sure, the price-earnings of another index—the Standard & Poor's 500—indicate we aren't in a bubble, at least one like 1999, says Mark Hulbert, editor of Hulbert Financial Digest.

He notes on MarketWatch that the S&P's price-earnings (P-E) ratio, based on 12-month trailing earnings is 19.1, compared to 29.7 in December 1999.

"Please, let’s stop the comparisons to the Internet bubble," Hulbert says.

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