Former U.S. Treasury Secretary and Goldman Sachs and Citigroup veteran Robert Rubin warned that U.S. political discourse needs to change because the Federal Reserve's current monetary policy has gone as far as it can go. Rubin spoke today at the TradeTech financial industry conference held in New York City.
"The first round of quantitative easing [QE 1] was necessary," Rubin says. "[The second round] was not as necessary."
He sees the danger that a third round of quantitative easing would increase the money supply, but undermine confidence in the Fed's inflation-fighting.
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"People might start to think that the Fed would plan to monetize the debt," Rubin says. However, he sees the Fed and the European Central Bank (ECB) stopping the policy before that risk starts to mount.
Rubin predicts a 50-50 chance that the U.S. economy faces an economic crisis in the short term if the country does not establish a sound fiscal policy, invest in critical infrastructure to improve competitiveness, and address healthcare costs as well as immigration and energy policies.
"The longer you wait, the more difficult it is to restore confidence," he says.
Although the current political climate makes this a daunting task, Rubin believes it is possible if the political parties can establish common ground. "It's going to be messy and difficult to do," he adds.
If changes are not made, Rubin estimates U.S. GDP could shrink approximately 4%.
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