The Fed won’t be able to save us

The Wall Street Journal

“Another recession is looming,” said Martin Feldstein. And this time the Federal Reserve doesn’t have the tools to turn the economy around. The next crisis won’t be an exact replay of the last one. Homes are not as overvalued as they were in 2006, the peak of the housing bubble. But stocks are at an inflated level, just as house prices were in the mid-2000s. In both cases, the cause is the same: Ultralow interest rates encouraged investors to borrow and spend, sending asset prices rocketing. Just as the housing bubble burst two years after the Fed started hiking interest rates in 2004, rising rates now will push

down the stock market. If share prices go back to their historical average relative to corporate profits— about 40 percent below today’s level—$10 trillion of household wealth will be wiped out. And as household wealth drops, consumer spending and economic activity will fall with it. When that happens, the Fed won’t have much room to cut rates. And with federal deficits already rising to $1 trillion a year, Congress won’t be able to spend money to stimulate the economy. The next recession will likely be deep and long, and there’s nothing the government “can do to prevent that from happening.”