The receding tide of QE will expose a lot of rocks

 Many financial markets have been running to excess – but the US Federal Reserve is only giving itself a limited toolbox to fix the problems which could now erupt. 
 
The US Federal Reserve will, in October, conclude its program of tapered monthly purchases of Treasury bonds and mortgage-backed securities (QE3).
 
This is in line with the initial announcement in June last year by then chair of the Federal Reserve, Ben Bernanke. The tapering began in December 2013 when the monthly target of $US85 billion ($91.4 billion) was cut by $US10 billion.
 
QE3 has had its critics, who viewed the cheap money channelled through the taper as underwriting artificially
inflated markets for equities and fixed-interest products, along with other financial assets across global
markets.
 
An outspoken critic of the US quantitative easing was the governor of the Reserve Bank of India, Raghuram Rajan, for three years the chief economist of the International Monetary Fund.
 
Rajan achieved professional notoriety in 2005 when he spoke at the annual Jackson Hole economic conference, criticising the economic management of Alan Greenspan as chairman of the US Federal Reserve.
 
That was three years before the collapse of Lehman Brothers. Last weekend, Rajan featured in the Financial Times in its luncheon guest interview.'No one knows'
 
Asked, in light of his earlier recognition of the global financial crisis, what was coming next, he replied: "The beauty of having been right once, or partially right once, in hindsight, is that now everybody expects you to be a prophet. But, the truth is, nobody really knows where the next one will come."
 
Rajan has been particularly concerned about the lack of co-ordination between central banks, citing the US Fed for reining in QE early last year without considering the effect on emerging economies.
 
Of even greater concern, he said, is a broader pattern of globalisation beset by repeated crises, as developed and developing worlds fail to co-ordinate, sending capital washing back and forth between them, violently destabilising their financial systems.
 
Rajan's concern about the potentially damaging mobility of leveraged financial capital is directly relevant to Australia, a significant player in the global carry trade.
 
Americans Martin Feldstein and Robert Rubin have been leading figures in the Republican Party and the Democrat Party respectively for some decades. Feldstein, a Harvard professor, was chairman of the Council Of Economic Advisers under US President Ronald Reagan. Rubin was President Bill Clinton's secretary of the US Treasury.Joint warning from Feldstein and Rubin.
 
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Max Walsh

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Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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