Hedge fund legend Stanley Druckenmiller launched a fierce attack on current Federal Reserve policies, arguing vehemently at the 4th annual Delivering Alpha conference in New York that the policy of quantitative easing and the failure to raise interest rates is a major mistake.
Druckenmiller insisted that Fed monetary policy was in part responsible for the 2008 financial crisis and that the central bank is using the same methods to insure a recovery. “I’m personally experiencing a sense of déjà vu,” he said.
Said Druckenmiller: “Does it make any sense to double-down on monetary policy, when monetary policy caused the problem in the first place?”
Druckenmiller defended the initial quantitative easing program launched by Fed Chairman Ben Bernanke in 2009 as necessary to save the financial system from a once-in-a-century event. But Druckenmiller argued that a variety of economic metrics — household income, employment, industrial production, retail sales and signs of deflation — suggests strongly that the recovery is well in place and that zero rates are simply generating a misallocation of resources and bubble conditions.
If someone came back to earth from Mars, he asked, would anyone look at those charts and think that interest rates are zero?
He cautioned that he has been wrong before. But he was particularly withering about the Fed’s forecasting record in the past, which, he said, did not raise confidence in the future. In terms of potential risks, he said, “I don’t know — but the Fed doesn’t either.”
Druckenmiller did give the government credit for steps taken since 2008 to protect against another crisis, like Dodd-Frank and steps taken to recapitalize the banks. “But market participants invariably try to get around regulations,” he said.
In a conversation with CNBC’s Joe Kernen after the speech, Druckenmiller did say that there were fundamental differences between the economic conditions in the mid 2000s and those that exist today. For a bubble to really take hold usually requires the inclusion of the banks in the mania. This time the banks, which have been struggling to cope with a wave of regulation, don’t seem to be involved.
In that conversation, Druckenmiller returned to the weakness of economists and the Fed as forecasters.