July 10, 2013

Bill Isaac, former chairman of the FDIC, thinks it's high time for the Federal Reserve to begin cutting back on its stimulus policy called "quantitative easing," or QE.

 

"I am hoping they will begin . . . this year," Isaac told Newsmax TV in an exclusive interview. "I've never liked QE. It's been very harmful to the economy and normalizing things."

 

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Federal Reserve Chairman Ben Bernanke said last month that the Fed may start tapering its QE later this year, but he appeared to backtrack on that stance late Wednesday, after the Isaac interview, saying "highly accommodative policy is needed for the forseeable future."

 

Keeping interest rates near historic lows has limited the income of retirees and kept some people from retiring, says Isaac, now senior managing director of FTI Consulting.

 

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"A lot of people are staying in the workplace that really would be retired if they could get a decent return on their money and opening up jobs for young people, where the unemployment rate is so high," he says.

 

"So QE has caused all sorts of distortions in the marketplace, and we would have been better off without it."

 

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The Fed has hurt the economy with its massive easing program, Isaac says.

 

"Businesses are not making investment decisions, consumers are not making spending decisions, because they really don't know what to predict for the future. . . .  People are afraid to spend or invest, and that has retarded the economy."

 

Isaac isn't impressed with the economy's gain of 195,000 jobs in June. "We need to be somewhere around 300,000 jobs a month for the unemployment rate to come down," he says.

 

"We have a large number of people who are in part-time jobs that would like to have full-time jobs. We have a lot of people who have given up working that would really like to work."

 

This period reminds Isaac of the 1970s stagflation – a combination of slow growth and high inflation. "So far I haven't seen a lot of inflation, but I don't rule out that that could happen," he says. "There are higher odds we're going to have inflation than we're going to have deflation."

 

Consumer prices rose 1.4 percent in the year through May.

 

As for the stock market's recent surge to record highs, "I don’t understand why the market's up as far as it is, except that the Fed put interest rates so low," Isaac says. "People didn’t have very many alternatives for their money."

 

The fact that the Fed artificially inflated the market "scares" Isaac. "That can't continue forever," he says. "I don’t trust any markets right now, because of the fiscal and monetary policies that we've never before witnessed, and we know they can't continue."

 

Meanwhile, economic weakness overseas, such as in China and Europe, could end up biting the United States, Isaac says. "That has to impact the U.S. if those trends continue," he says.

 

"So now is the time for people to be cautious with their money."

 

Editor’s Note: Put the World’s Top Financial Minds to Work for You