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U.S. Economists, Bankers Warn of New Financial Crisis

Aug. 21, 2017 (EIRNS)—Die Welt today carries an article based on interviews with three U.S.-based economists warning of a new trans-Atlantic financial crisis. The three, Daniel McFadden of the University of Minnesota, Eric Maskin at Harvard, and Edward Prescott of the Minneapolis Federal Reserve Bank, were interviewed by Die Welt while participating in an conference in Lindnau, Germany, which it characterized as a kind of "Nobel Prize summit meeting." In "Nobel Prizewinners Warn of New Financial Crisis," they are reported warning that there is a high near-term risk of a new financial crash; and that it is being obscured by media discussions of the risk of nuclear confrontation, terror attacks and battle over the American Presidency.

"The smartest minds in economics," Die Welt says, "clearly disagree with the U.S. Federal Reserve Bank chair Janet Yellen," who in June made the Neville Chamberlain-like declaration that there "would not be another financial crash in our lifetime." Stated Prescott, "It is a greater certainty that a financial crisis will occur in the not-distant future."

Two of the three economists saw the euro as contributing to the high risk of blowout. But all three were very far from pointing to the solution to prevent this.

Bloomberg reported today that researchers from several major U.S.-based banks warned on Aug. 2, through the Treasury Borrowing Advisory Committee (TBAC, a group of bank economists which advises the Treasury), of a looming "financial engineering shock." This points the finger directly at a potential bubble meltdown in U.S. corporate debt. "Financial engineering" is the term used to describe corporations accumulating large amounts of debt from banks and through the bond market, and using the borrowing to buy back their own stocks, pay big dividends, or take over other companies. It has been the main driver of the extraordinary doubling of U.S. non-financial corporate debt from $7 trillion in 2010 to $14 trillion in 2017, with interest rates unsustainably near zero.

The TBAC was warned that corporations had piggybacked on the Federal Reserve’s huge "quantitative easing" emissions to borrow these huge sums virtually without interest. If quantitative easing now is slowly reverse, as the Fed plans, "even very small declines in Treasury prices could ... lead to a big drop in corporate bond prices and stocks," said TBAC chair jason Cummins. Bloomberg adds, "investors are underestimating the trouble that the Fed’s plans could bring to corporate debt markets."