Tags: Hussman | Fed | Asset | Bubble

Hussman: Fed Creating Risky Asset Bubble

Monday, 26 March 2012 12:43 PM

Economist and fund manager John Hussman says the actions of the Federal Reserve are creating risk, not managing it.

"By creating enormous amounts of paper, and hoarding higher duration securities like Treasury securities, the Fed is trying to force investors into risky assets until the prospective returns on all competing assets are driven so low that investors and banks holding cash are willing to just sit on it," Hussman writes in a note to investors.

"In short, the Fed has focused its efforts on creating a bubble in risky assets, on the misguided, semi-psychotic, and empirically disprovable notion that this will make people feel wealthier and get them to spend and borrow — despite the fact that their incomes can't support it without massive government transfer payments."

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

Aside from periodic jolts of enthusiasm that release some amount of pent-up demand for a few months at a time, what this policy has actually produced is near-zero prospective returns on nearly every class of assets, says Hussman.

“These assets will now go on to actually achieve tepid returns for an extended period of time, provided that things work out well, and a collapse in the prices of risky assets if investors ever get the inclination to demand a normal return as compensation for the risk they are taking,” he says.

The Wall Street Journal reports that Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.

The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery.

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

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Monday, 26 March 2012 12:43 PM
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