Tags: Roubini | Fed | credit | bubble

Roubini: 'We're in Beginning of Credit Bubble'

By Dan Weil   |   Friday, 09 May 2014 09:55 AM

The debt market is showing signs of overheating, including the heavy issuance of junk bonds and bonds without strong protections for investors, says renowned economist Nouriel Roubini of New York University.

"All the risky things that were happening back in '06 and '07 are back again to the same level, if not more," he tells Fox Business Network.

"So we are in the beginning of a credit bubble, but just the beginning. A year or two from now, with the policy rate still barely above zero, the risk is that it becomes a full-fledged bubble."

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Roubini predicts that the Fed will start raising interest rates in the middle of next year and that it will boost the federal funds rate to 4 percent by the end of 2018 from zero to 0.25 percent now.

The 10-year Treasury yield will rise to 4.25 percent at that point from 2.6 percent now, he suggests.

"The economic recovery is so anemic that a very slow exit [by the Fed] from [its] zero policy rate is justified," Roubini argues. But, "the extra liquidity has gone into asset inflation. . . . Asset inflation can become frothiness, which can lead to bubble."

There may not be a bubble in stocks now. "But if we're going to exit so slowly, then what's the risk of a bubble one year from now, two years from now?"

The Fed has a dilemma, he maintains. "If you exit [from easing] too soon, you get a bond market crash and kill the economy. If you exit too late, you create a financial bubble. That's the biggest challenge for the Fed in the next three to four years."

Esteemed Fed scholar Allan Meltzer of Carnegie Mellon University is concerned that the Fed's massive stimulus program, which has sent its balance sheet soaring above $4 trillion, is laying the groundwork for serious inflation.

"The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5 percent this year, the biggest annual increase in three years. Over the past 12 months through March, the consumer-price index (CPI) increased 1.5 percent," he writes in The Wall Street Journal.

"These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money — and in a reckless fashion — for years."

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