Martin Feldstein on how Treasury yields could trigger a financial crisis

The
New York Stock Exchange.

Lucas
Jackson/Reuters

• The next bear market risks causing a $10 trillion crash
  in the US housing market that would lead to a downturn to rival
  the great depression of the 1930’s, according to Martin
  Feldstein, the President of the US National Bureau of Economic
  Research.
• A spike in ten-year Treasury yields will likely trigger
  a bear market, which could grow into a wider crisis that the
  economy is not prepared to fight, he added.
• “When the next recession comes, it is going to be
  deeper and last longer than in the past. We don’t have any
  strategy to deal with it,” Feldstein told
  The Daily Telegraph.
• The EU would be worse hit, then the US or UK
  because it lacks strong defences against deflationary shocks,
  Feldstein said.

The next US bear market will most likely be caused by a spike in
ten-year Treasury yields and risks setting off a $10 trillion
crash in US household assets, according to Martin Feldstein, the
President of the US National Bureau of Economic Research.

“When the next recession comes, it is going to be deeper and last
longer than in the past. We don’t have any strategy to deal with
it,” Professor Feldstein, a former chairman of the White House
Council of Economic Advisors told
The Daily Telegraph, adding that heads of the economy now
lack emergency tools to recover in the event of a severe
recession.

Feldstein believes the effects of a bear market will spread into
the retail economy, draining it of $300-400 billion a year, and
risking an economic crash to rival the Great Depressions of the
1870’s and 1930’s.

A decade of very low interest rates and fiscal stimulus by the US
Federal Reserve has pushed Wall Street equities to breaking point
and no longer look anything like historic fundamentals, he told
the Daily Telegraph.

“Fiscal deficits are heading for $1 trillion dollars and the debt
ratio is already twice as high as a decade ago, so there is
little room for fiscal expansion… We have no ability to turn the
economy around,” he said.

The Eurozone will be even worse off in the event of a deep crisis
because the European Central Bank hasn’t yet built strong
defences against deflationary shocks. The half-constructed nature
of the EU’s monetary system means any response will likely be too
little too late.

“The Europeans don’t have a fiscal back-up. They don’t have
anything. At least you have your own central bank and treasury in
Britain, so you will be happier,” Feldstein said.

“Mario Draghi is going to be very happy when he has left the ECB
because it is not clear how they are going to get out of this
when they still have zero rates. They can’t play the trick of the
cheap euro again.”