Harvard’s Feldstein: 'More Air Is Going to Come Out of the Stock Market'

Thursday, 17 May 2012 08:04 AM

By Dan Weil

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Two weeks ago, Harvard economist Martin Feldstein said stocks are in a bubble, and now he maintains that the bubble hasn’t fully burst.

The Federal Reserve’s accommodative monetary policy has kept long-term interest rates near record lows, fueling the bubble, Feldstein tells Yahoo.

Already, "a lot of air has come out of the stock market," he says, with the Standard & Poor’s 500 Index falling 5 percent since Feldstein’s earlier pronouncement.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

More declines are coming, because the Fed is unlikely to implement a third round of quantitative easing, says the former head of the Council of Economic Advisers, under President Ronald Reagan.

While the Fed’s easing has pushed interest rates down and stock prices up, it hasn’t had much impact on the real economy, Feldstein says.

"Having tried it twice and not succeeded, it's not clear there's any reason for them to do it again."

As a result, “I would say more air is going to come out of the stock market," Feldstein says.

He agrees with Fed Chairman Ben Bernanke that fiscal policy is what must be addressed now. But Feldstein sees little chance that Congress will deal with the “fiscal cliff”' before elections.

Other economists also are worried about the tax increases and spending cuts currently scheduled for next year.

If that fiscal austerity isn’t reduced, the economy will fall into recession, David Rosenberg, chief economist at Gluskin Sheff, tells The New York Times.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans




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