Tags: Martin | Feldstein | Fed | Easing | Threatens | Economic | Recovery

Feldstein: Big Fed Easing Threatens Economic Recovery

Wednesday, 03 Nov 2010 09:22 AM

The Federal Reserve’s plans to buy possibly up to hundreds of billions in assets from the country’s banks — a move known as quantitative easing — carries much more risk and than potential for reward, says Harvard economics professor Martin Feldstein.

As many expect, the Fed will buy long-term government bonds held by banks, perhaps up to $1 trillion, thus pumping the same amount of cash into the economy in the process.

Expectations of such a move have lowered long-term interest rates, weakened the dollar, boosted global commodities prices and farm land as well as stock prices in the U.S. and overseas.

Nevertheless, with recovery will eventually come and with it, higher interest rates.

For those carrying hefty amounts of debt needing servicing, higher borrowing costs will cause pain.

“The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities,” Feldstein writes in the Financial Times.

“These risks should be clear after the recent crisis driven by the bursting of asset price bubbles.”

“The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy.”

With expectations of very low returns in the United States, many investors are running to emerging markets, pushing those currencies higher in the process and irking fiscal and monetary authorities abroad.

“We are all under attack by the relaxed monetary policy of the United States,” says Colombian Finance Minister Juan Carlos Echeverry, according to Reuters.

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The Federal Reserve s plans to buy possibly up to hundreds of billions in assets from the country s banks a move known as quantitative easing carries much more risk and than potential for reward, says Harvard economics professor Martin Feldstein. As many expect, the...
Martin,Feldstein,Fed,Easing,Threatens,Economic,Recovery
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2010-22-03
Wednesday, 03 Nov 2010 09:22 AM
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