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U.S. Fed Warns of New Financial Bubble Crisis About to Burst

Stock-Markets / US Debt May 13, 2013 - 12:59 PM GMT

By: Money_Morning

Stock-Markets

Ben Gersten writes: Before the housing market crash, economists warned that record low-interest and mortgage rates were fueling a housing bubble.

Unfortunately, those fears were both overlooked and underestimated.

Now, an advisory council to the U.S. Federal Reserve is warning the Fed that its record $85 billon-a-month stimulus and ultra-low interest rates are fueling new bubbles in student loans and farmland.


"Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis," according to minutes of the council's Feb. 8 meeting.
In addition, "agricultural land prices are veering further from what makes sense," the council said. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."

These warnings come from the Federal Advisory Council, a panel of 12 bankers chosen by the 12 Federal Reserve banks, which consults with and advises the Fed. Members of the council include the CEOs of Morgan Stanley (NYSE: MS), State Street Corp. (NYSE: SST), BB&T Corp. (NYSE: BBT), Bank of Montreal (NYSE: BMO), Capital One Financial Corp. (NYSE: COF) , U.S. Bancorp (NYSE: USB) and the former CEO of PNC Financial Services (NYSE: PNC).

What's more, the council warned the Fed in September that QE3 and its plan to buy bonds indefinitely would distort bond prices and have a limited impact on the economy and that "uncertain effects" will arise from the eventual unwinding of the balance sheet, including "risks to price and financial stability."

So while Uncle Ben likes to remind us that the Fed will step in and take appropriate fiscal measures when necessary, the central bank's own council believes the Fed's actions are doing more harm than good.

Is Farming Bubble About to Burst?

In 2012, the annualized total return on investment farmland was 18.58%. In addition, the Kansas City Fed reported that irrigated cropland in its district rose 30% during 2012, while the Chicago Fed reported a 16% increase.

"With many dollars and buyers chasing farmland, it isn't surprising to see land values increase substantially," Barry Ward, production business management leader for the Ohio State University Extension, told AgWeb. "Crop profitability along with low interest rates have been the primary drivers in the run-up in cropland values."

But another factor besides the Fed is driving up land prices - an unpredictable Mother Nature.

"The weather will dictate what happens to land values," Steve Bruere, president of Iowa real estate brokerage People's Company, told AgWeb. "We'll have the world's largest crop planted in 2013. If we have timely rains, commodity prices will go south and that will have a negative impact on values. If we have another short crop, then land values could continue their ride up."

While farmland prices may continue to rise, it's not necessarily a bubble that will soon burst.
Most observers expect that the bubble will not collapse, but simply deflate slowly until land prices and crop returns are once again in line with economic reality.

The Student Loan Crisis

The student loan crisis, on the other hand, could be the next bubble to burst - and bring the economy down with it.

Student loans now exceed credit card debt and just topped the $1 trillion mark. Plus, the 90-day delinquency rate, at 17%, is higher than those rates for other consumer loans such as mortgages, auto and credit card debt.

Like housing loans, the rise in student debt has been fueled by the idea of the American Dream - and with the help of the Fed.

Student loans share features of the housing crisis, including "significant growth of subsidized lending in pursuit of a social good, in this case higher education instead of expanded home ownership," the council said.

But at some point, the realities of the past few years have caught up with many Americans holding student loans and will continue to do so.

That's because tuition keeps rising, median income levels continue to fall, and hiring remains weak for recent grads, especially for those with little experience.

A bachelor's degree no longer guarantees a secure job or offers the opportunity to advance in a career.

These days, a degree is often associated with debt, unemployment and the need to get another degree in order to get a good job.

In fact, half of Americans under 25 with a college degree are either unemployed or working in a job for which they're overqualified.

But that won't stop the Fed from printing away and telling us everything is OK, until suddenly it isn't.

Further Reading: For more on what Bernanke has in store for investors, check out Why We Can't Avoid Ben Bernanke's "Monetary Cliff"

Source :http://moneymorning.com/2013/05/09/the-new-crisis-warning-just-issued-to-the-federal-reserve/

Money Morning/The Money Map Report

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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Comments

peterpalms
14 May 13, 22:47
Do we really need legalized theft by the fed

Don’t confuse liquidity with credit Why is the Fed issuing QE

There is zero correlation between the Fed printing and the money supply. If you don’t believe this, you owe it to yourself to study up on monetary policy until you do.

This is an issue that brings them out of the bunker like no other in economics. But if you are an investor, trader or economist, understanding—and I mean really understanding, not just recycling things you overheard on a trading desk or recall from Econ 101—the mechanics of monetary policy should be at the top of your checklist. With the US, Japan, the UK and maybe soon Europe all with their pedals to the monetary metal, more hinges on understanding this now than ever before.

The Federal Reserve only provides liquidity. The amount of liquidity it puts in the reserve system has no direct impact on the issuance of credit by banks or shadow banks. Only banks and shadow banks can create credit. And they lend either out of cash on hand or by repo-ing treasuries, mortgages, or deposits, if cash on hand is insufficient. And collateral that is pledged once can be pledged over and over and over (collateral chain). So, even though credit increases, the total amount of banking reserves on deposit at the Fed remains unchanged (though composition across banks may change).

So if the banks and shadow banks can just as easily repo their Treasury and mortgage holdings to finance lending, and there is no link between base money and credit creation, why is the Fed doing QE in the first place?

http://finance.yahoo.com/blogs/the-exchange/why-titans-finance-economics-wrong-174530874.html

Details at above URL address


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