Former Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance” in the stock market 13 years ago. Nobel laureate economist Joseph Stiglitz warns of it today.
Weak economic recovery, particularly in the jobs sector, will weigh on stocks, he told Bloomberg. The unemployment rate hit a 26-year high of 9.8 percent in September.
“It’s pretty clear that the situation will continue to get worse,” Stiglitz said.
In a vicious circle, the slumping economy prevents companies from hiring, and employment losses keep the economy weak. So look for unemployment to keep rising as the economy sags, Stiglitz said.
The job woes have made it more difficult for consumers to pay their debts, especially for credit cards, he points out.
The Columbia University professor also cited the difficulties for residential and commercial real estate.
“There’s a lot of risk going ahead of some big bumps. There’s a very big risk that markets have been irrationally exuberant,” he said.
The Standard & Poor’s 500 Index has soared 58 percent since March.
As for this year’s fiscal stimulus package, the chances of the U.S. economy rebounding meaningfully before 2011, when most of the spending measures expire, are very slim, Stiglitz argues.
He isn’t the only one who foresees economic sluggishness.
"The recovery will turn out to be moderate by historical standards," New York Federal Reserve President William Dudley said in a recent speech.
“And that’s why the Fed has pledged to keep interest rates low.”
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