Alan Greenspan, the former Federal Reserve chairman appointed by President Ronald Reagan, said the stock market is rising on the chance that banking laws enacted after the 2008 financial crisis will be thrown aside.
The S&P 500 stock index jumped more than 12 percent after President Donald Trump won the November election on a pro-business platform of tax cuts, less regulation and spending on roads, bridges and airports. After reaching a record high in March, stocks stalled out after Republicans withdrew a plan to change the healthcare law, casting doubt on Trump’s other pledges.
Greenspan said lawmakers should abandon the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Barack Obama signed into law in 2010 as a way of requiring banks to have more money to handle a crisis.
"If you get rid of Dodd-Frank, it's going to have a very significant positive impact on the economy," Greenspan told CNBC. "In my judgment, that's where the surge in the stock prices has come from. It's very difficult to find anything other than that, which I find really positive."
While the law was intended to prevent another taxpayer bailout of financial companies, critics say the regulations have hampered economic growth by limiting the ability of businesses and consumers to get loans.
President Trump in February ordered the Treasury and other financial regulators to review the banking and consumer finance rules created under Dodd-Frank.
Greenspan in February warned that Trump's economic policies risk plunging America into a period of 1970s-style stagflation with low growth and "out of control" inflation.
Greenspan also expressed "grave concerns" about the future of the eurozone, where countries in northern Europe such as Germany have "in effect been funding the deficits of the South," the UK Telegraph reported.
"That cannot continue indefinitely," Greenspan wrote in the latest issue of Gold Investor, the Telegraph reported. "The eurozone is not working," said Greenspan, who led the US central bank between 1987 and 2006.
Under Trump, Greenspan warns that America could enter a "destabilizing period" where inflation rises sharply as workers begin to demand higher pay.
This could return America to "what happened in the 1970s, when we last experienced stagflation and there were real concerns about inflation spiraling out of control,” he predicted.
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