Former Reagan Budget Head David Stockman: Fed Has Created Gargantuan Global Bubble
Wednesday, 27 Nov 2013 10:26 AM
By Dan Weil
The Federal Reserve's quantitative easing program is brewing asset bubbles around the world, says David Stockman, White House budget director under President Ronald Reagan.
The central bank is purchasing $85 billion of Treasurys and mortgage-backed securities a month.
"The Fed is exporting this lunatic policy worldwide," Stockman told CNBC. "Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere."
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In the United States, for example, stock indices have risen to record highs.
The global results of the easing won't be pretty, Stockman says. "It's only a question of time before the central banks lose control, and a panic sets in when people realize that these values are massively overstated," he said.
Foreign central banks are easing "for either good reasons of defending their own . . . trade and their exchange rate, or because they're replicating the Fed's erroneous policies," Stockman said.
He cited the Russell 2000 small-stock index as an example of the mania. "It's trading at 75 times reported trailing earnings. That makes no sense," Stockman said.
To be sure, the price-earnings of another index—the Standard & Poor's 500—indicate we aren't in a bubble, at least one like 1999, says Mark Hulbert, editor of Hulbert Financial Digest.
He notes on MarketWatch that the S&P's price-earnings (P-E) ratio, based on 12-month trailing earnings is 19.1, compared to 29.7 in December 1999.
"Please, let’s stop the comparisons to the Internet bubble," Hulbert says.
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Poster Comment:
Bubbles have a tendency to burst. What will happen next? ;)