While mainstream economists are championing the Federal Reserve’s handling of the economy, billionaire investor Carl Icahn is warning that the stock market is primed for a crash.
Writing in response to Donald Trump’s cabinet offer, he aired his views on the state of the economy and the Federal Reserve.
Mr. Icahn addressed the Federal Reserve’s quantitative easing (QE) program by saying “we have ‘a big fat bubble’ coming up. We have artificially induced low interest rates.” (Source: Shareholders’ Square Table, June 19, 2015.)
Over the last several years, the Federal Reserve’s bond-buying program expanded the central bank’s balance sheet from less than $1.0 trillion in 2007 to over $4.0 trillion today. (Source: The Economist, June 19, 2015.)
The Fed would essentially buy low-quality assets from commercial banks, adding liquidity to the market. The infusion of cash onto banks’ balance sheets allowed them to purchase new assets, thus driving the stock market higher. The success of QE is a contentious issue, but most analysts agree it prevented the recession from deepening.
Critics of QE are concerned about its affect on markets. The low interest rate environment was meant to stimulate domestic borrowing, but it also drove investors to emerging markets. Bonds from developing economies offer fatter yields than the rock-bottom rates in the U.S.
When the Federal Reserve began scaling back their asset purchases, markets became unstable. Icahn is one of many finance gurus to suggest that both stocks and investors have grown dependant on support from the Fed. They argue that when forced to stand on its own two legs, the stock market will fall.
“Never in the history of the Federal Reserve have interest rates been artificially held down for so long at the extremely low rates existing today,” wrote Icahn. “I applaud Donald for speaking out on this issue—more people should.” (Source: Shareholders’ Square Table, June 19, 2015.)