PhotoIn a video released today, billionaire investor and legendary Wall Street trader Carl Icahn said the Federal Reserve policy of keeping interest rates at 0% for the last seven years has created “dangerous bubbles” in art, real estate, and high yield bonds.

"It's like giving somebody medicine and this medicine is being given and given and given and we don't know what's going to happen - you don't know how bad it's going to be,” Icahn said in the video. “We do know when we did it a few years ago it caused a catastrophe, it caused '08. Where do you draw the line?"

Icahn is hardly alone in predicting economic collapse. For months, former Rep. Ron Paul (R-TX) has appeared in ads for Stansberry Research, a newsletter publisher, promoting a video in which he warns of an even greater economic crisis in the offing – but this one is also due to the Fed's monetary policy.

The problem with “free money”

Why, exactly, is the extended period of “free” money a bad thing? How does that set the economy up for a catastrophic fall? Back in 2010, less than two years after the zero interest rate policy (ZIRP) went into effect, there were plenty of warnings.

At that time, financial blogger Charles Hugh Smith laid out some of the arguments. With ZIRP, he wrote, savers, investors, and money managers cannot earn any kind of return for having their assets in cash. Therefore, they have to look elsewhere for a return on capital.

That means less money is going into banks, at a time when banks need to replenish their reserves. With rates at zero, even the banks can't earn a return.

Since banks can borrow from the Fed at 0%, many are doing so in order to buy bonds in other countries, where rates are higher. The banks earn a return but it also draws money out of the U.S. economy.

Encourages risk-taking

ZIRP also encourages risk-taking. Instead of keeping money in cash, individuals and institutions are putting it in assets that have dramatically risen in value. Icahn specifically mentions art and real estate.

When he worries about real estate, he is obviously not talking about suburban tract houses, but rather palatial homes in red hot markets like New York, San Francisco and San Jose, where the wealthy have bid up the price of condos well past a million dollars.

Money has also flowed into stocks, raising prices beyond what the fundamentals of the underlying companies might justify. In recent weeks, money has been flowing out of stocks and prices are falling.

Five years ago Smith concluded even then that evidence of the Fed's interest rate policy was “perniciously undermining the financial sector and the U.S. economy is increasingly persuasive.”

The Fed is increasingly signaling that it will begin raising rates before the end of the year, but a lot of people like Carl Icahn think it may be too late.

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