Story Appeared On USA TODAY
A group of bankers have just dumped two more problems on the Federal Reserve's plate.
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 U.S.
Their
alarm comes at a time when financial heavyweights on the Federal Open
Market Committee, the Federal Reserve's policy-making arm, are debating
whether the benefits created by their monthly purchases of $85 billion
in bonds outweigh the risk of financial instability.
Fed 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 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 FAC's Feb. 8
gathering, according to documents obtained by Bloomberg news service
through Freedom of Information Act requests. "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
after its Feb. 3, 2012, meeting. The bankers told the FOMC 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."
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 told a Bloomberg
reporter on Aug. 7.
After the Fed 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 — currently at
7.5%, drops to 6.5% or the annual inflation rate rises above 2%. The Fed
has also launched three rounds of bond purchases, called quantitative
easing, which have pushed its balance sheet to a record $3.3 trillion as
of May 1.
The QE spending's impact on farmland prices is being
documented by regional Fed banks, particularly across the Midwest's corn
belt. The Chicago Fed said the value of irrigated cropland in its
district rose 16% in 2012, while the Kansas City Fed reported a 30% 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 a Bloomberg story. 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, a broad measure of price pressures on commodities, has fallen
25%.
The FAC said it supports the central bank's monetary policy
at their February meeting, noting that the recoveries in the housing and
auto 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 FAC's minutes said. "As the period
of low rates is extended, these pressures have increased."
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