How the Fed's QE Taper May Trigger the Next Global Financial Crisis

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Fed Chairman Bernanke Semi-Annual Monetary Policy Report To Senate Committee
Pete Marovich/Bloomberg via Getty ImagesFederal Reserve Chairman Ben Bernanke
More than five years after the financial crisis began, many on Wall Street, Main Street and in government at all levels agree there's still much to be done to get the U.S economy back on track.

Yet even the improvements we've already achieved could be derailed by a looming worldwide financial crisis -- a crisis caused by the very economic stimulus policies put in place by the Federal Reserve to help the U.S. get out of its dire economic straits. At least, that's the warning coming from economist Stephen Roach, senior fellow at Yale University's Jackson Institute for Global Affairs.

In a post at the Project Syndicate website, Roach writes:

As the Fed attempts to exit from so-called quantitative easing (QE) -- its unprecedented policy of massive purchases of long-term assets -- many high-flying emerging economies suddenly find themselves in a vise. Currency and stock markets in India and Indonesia are plunging, with collateral damage evident in Brazil, South Africa and Turkey.

Roach goes on to say that the Fed views itself as blameless -- a perspective he feels shows the Federal Open Market Committee to be steeped in denial. The Fed's quantitative easing -- the first round of which began in late 2008 -- pushed interest rates to record-low levels and kept them there, leaving investors to look for other places to park their money and chose emerging economies in search of higher yields.


But as word has spread of the Fed's plan to taper its stimulus, investors have begun pulling money out of those countries' economies, leaving policymakers in them with few other options but to adopt conventional strategies -- such as raising interest rates -- which tend to slow growth.

Should the Fed's policies induce another financial crisis, it won't be the only entity worthy of blame. Roach notes that each of the countries mentioned above is running a huge current account deficit caused by increased imports and too few exports. That's a sure sign "of a pre-crisis economy living beyond its means -- in effect, investing more than it is saving."

Sound familiar? It should. More from Roach:

America's gaping current-account deficit of the mid-2000's was, in fact, a glaring warning of the distortions created by a shift to asset-dependent saving at a time when dangerous bubbles were forming in asset and credit markets.

Developing economies are now feeling the full effect of the Fed's plan to begin rolling back quantitative easing," Roach says. And though politicians in those countries are responsible for failing to keep their own financial houses in order, he says, "the Fed is just as guilty, if not more so, for orchestrating this failed policy experiment in the first place."

(h/t Business Insider)




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141 Comments

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betty_brock

FIRE THE FED

August 29 2013 at 8:37 PM Report abuse +1 rate up rate down Reply
Dennis

First they say it shouldn't be done and now they say we can't do without it. Which is it?

August 29 2013 at 5:08 PM Report abuse +1 rate up rate down Reply
jimlaw311

I have found that by staying balanced in business and play,limitating my activities to those things I can do and knowing that is God\'s will for me today all these domestic and worldwide problems become \" ...full of sound and fury signifying nothing\"

August 29 2013 at 4:22 PM Report abuse rate up rate down Reply
betty_brock

Looney liberals hate war monger, Bush but love war monger, Obama. Such hypocrites.

August 29 2013 at 4:10 PM Report abuse +1 rate up rate down Reply
2 replies to betty_brock's comment
rostra

No looney Liberals dislike both fiasco's. Only bigots think otherwise about Liberals.

August 29 2013 at 4:57 PM Report abuse -1 rate up rate down Reply
1 reply to rostra's comment
betty_brock

Bigot? How so?

August 29 2013 at 8:36 PM Report abuse -1 rate up rate down
Dennis

How can you call Obama a War Monger? He has ended more wars than he has started.

August 29 2013 at 5:09 PM Report abuse -1 rate up rate down Reply
betty_brock

FIRE THE FED. The more they print the less what you have is worth.

August 29 2013 at 4:02 PM Report abuse +2 rate up rate down Reply
1 reply to betty_brock's comment
rostra

What they print has zip to do with the value of the dollar, go back to school, and this time pay attention in Economics class.

August 29 2013 at 4:58 PM Report abuse -1 rate up rate down Reply
1 reply to rostra's comment
amani4000

You have not a clue rostra. The fact that out of every dollar you hold, 48 cents is debt and the more we print money we do not have increases that debt, the next call for money at the window is going to be really bad. WHAT CLASS DID YOU ATTEND? We are falling behind in the trillions on tax revenue. Fact. Nothing has been done to correct the lawlessness that created the last collapse, other than rewarding the culprits with low borrowing intrest rates. Hold on Rostra cause the incoming collapse is going to pale the last by tenfold. Money from thin air is nothing more than thin air. Do Your Homework!

August 29 2013 at 6:05 PM Report abuse +1 rate up rate down
LFunchesTSC

Sounds to me like a group of secretive "investors" are lurking around in the murky background maniulating the worlds economies.

August 29 2013 at 2:48 PM Report abuse +3 rate up rate down Reply
billharn

\"Yet even the improvements we\'ve already achieved . . .\" Oh, really? And what \"improvements\" are you referring to? Please tells us, because I haven\'t seen any. In particular, my savings account is earning me exactly zero return, and I am retired. I was getting better interest in 1962 than I am today. Thanks \"Fed.\" Or should I say Fed-up!

August 29 2013 at 2:15 PM Report abuse +4 rate up rate down Reply
jhrooney

I wonder how much the Wall Street trading houses paid the author and Huffington Post to write this story. Wall Street gets paid by the transaction so the more worry they spread the more trades are made and the more they make.
It is too bad the press doesn't wise up to this old trick. It has been around for 150 years.

August 29 2013 at 2:02 PM Report abuse -1 rate up rate down Reply
Teresa & Sandy

and next we have larry summers - this country is s-----d

August 29 2013 at 1:27 PM Report abuse +2 rate up rate down Reply
1 reply to Teresa & Sandy's comment
rostra

Yeah to bad the QE Taper was enacted in 2008, by the Bush administration, at least Obama is smart enough to wind it down.

August 29 2013 at 4:59 PM Report abuse -1 rate up rate down Reply
yurday6

This has a lot to do with the B.S. 401K plans. It's common sense that when everyone is in it, it fails. Just like the Real Estate market. It is a ponzy scheme developed by the gov't and wall street to pacify the masses into thinking they are rich players. The gov't thinks they can dissolve SS with this dumb 401k plans. Meantime the economy gets hurt more from the gov't and wall street trying to keep the 401ks up falsely.

August 29 2013 at 1:00 PM Report abuse +1 rate up rate down Reply