The Federal Advisory Council, made up of 12 bankers who meet quarterly to advise the central bank, warned that farmland prices are inflating “a bubble” and growth in student-loan debt has “parallels to the housing crisis,” which was the primary cause of the Great Recession in the United States.
Their alarm comes at a time when financial heavyweights on the Federal Open Market Committee are already debating whether the benefits created by their monthly purchases of $85 billion in bonds outweigh the risk of financial instability. Chairman Ben Bernanke has argued time and again that the program is essential to the economic recovery, but others are less convinced. Fed Governor Jeremy Stein and Kansas City Fed President Esther George have raised concerns that the extended period of low interest rates is increasing the risk of asset bubbles.
“Agricultural land prices are veering further from what makes sense,” noted the minutes of the council’s February 8 gathering, according to the documents obtained by Bloomberg through the Freedom of Information Act. “Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.”
As for student loans, recent growth has pushed debt levels to nearly $1 trillion, meaning it “now exceeds credit-card outstandings and has parallels to the housing crisis,” the council said in its February 3, 2012, meeting. The bankers told the Federal Open Market Committee that student lending exhibited characteristics similar to those seen in the housing crisis, including “significant growth of subsidized lending in pursuit of a social good” — in this case, higher education rather than expanded home ownership.
Just as the mortgage lending boom pushed home prices upward, student loan lending has put upward pressure on tuition. The bankers said both examples showed a “lack of underwriting discipline.” But for his part, Bernanke has dismissed parallels between student lending and the subprime mortgage crisis. “I don’t think it’s a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government,” Bernanke said of student debt in Washington on August 7, according to Bloomberg.
After the Federal Reserve first lowered its target interest rate to near zero in December 2008, the central bank promised to keep it at that level until the unemployment rate — which currently stands at 7.5 percent, drops to 6.5 percent or inflation rises above 2 percent. The Fed has also launched three rounds of bond purchases, called quantitative easing, which has pushed its balance sheet to a record $3.32 trillion as of May 1.
Regional Federal Reserve banks have gathered data documenting the swift increase in farmland prices, particularly across the Midwest’s Corn Belt. The Chicago Fed said irrigated cropland in its district rose 16 percent in 2012, while the Kansas City Fed reported a 30 percent jump in the same period.
“Investors who are seeking a positive return on their funds have shied away from bond markets,” the council said, according to Bloomberg. Instead, they opted for real estate “as both a hedge against inflation and a means of achieving better than the negative real return associated with fixed-income securities.” Increases in land prices have continued even as commodity prices have weakened. Since hitting a record high in March 2011, the S&P GSCI Agriculture Index has fallen 25 percent.
The Federal Advisory Council said that it supports the central bank’s monetary policy at their February meeting, noting that the recoveries in the housing and automobile sectors have been “especially encouraging.” Yet, there have been “collateral consequences” of the current policy; the low-interest environment has pushed “many to seek higher returns by accepting greater interest rate or credit risk,” the minutes said, according to the publication. “As the period of low rates is extended, these pressures have increased.”
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