Bankers Warn Fed of Farm, Student Loan Bubbles Echoing Subprime

Bankers Warn Fed of Farm, Student Loan Bubbles Echoing Subprime

A group of bankers that advises the Federal Reserve’s Board of Governors has warned that farmland prices are inflating “a bubble” and growth in student-loan debt has “parallels to the housing crisis.” The concerns of the Federal Advisory Council, made up of 12 bankers who meet quarterly to advise the Fed, are outlined in meeting minutes obtained by Bloomberg through a Freedom of Information Act request. Their alarm adds to a debate on the Federal Open Market Committee about whether the benefits from their monthly purchases of $85 billion in bonds outweigh the risk of financial instability. While Chairman Ben S. Bernanke has argued the program is worth pursuing, Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles. “Agricultural land prices are veering further from what makes sense,” according to minutes of the council’s Feb. 8 gathering. “Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.”The Fed first lowered its target interest rate to near zero in December 2008 and has pledged to hold it there until the unemployment rate, currently 7.5 percent, falls to 6.5 percent. The U.S. central bank has also engaged in three rounds of bond purchases, known as quantitative easing, driving the Fed’s balance sheet to a record $3.32 trillion as of May 1.

Cropland Prices

Data compiled by the regional Fed banks have documented the rapid run-up in farmland prices, particularly across the Midwest’s Corn Belt. The Kansas City Fed said irrigated cropland in its district rose 30 percent during 2012, while the Chicago Fed reported a 16 percent increase.

“Investors who are seeking a positive return on their funds have shied away from bond markets,” the council said. 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.”

The land-price gains have continued even as commodity prices have softened. The S&P GSCI Agriculture Index reached a record in March 2011 and has since fallen 25 percent.

The Federal Advisory Council dates back to the Federal Reserve’s founding in 1913. Current members include Joseph Hooley, chairman and chief executive of State Street Corp. (STT) in Boston; James Gorman, chairman and chief executive of Morgan Stanley in New York; Kelly King, chairman and chief executive of BB&T Corp. in Winston-Salem, North Carolina; and D. Bryan Jordan, chairman and chief executive of First Horizon National Corp. (FHN) in Memphis.

Student Lending

The council regularly advises the Fed on an array of lending, economic and regulatory topics. The bankers last year shared their view of the growth in student lending.

“Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis,” the council said in its Feb. 3, 2012, meeting. The trend has continued, with the Consumer Financial Protection Bureau saying in March 2012 that student debt had topped a record $1 trillion.

The bankers said student lending shares 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.

Discipline Lacking

The lending has put upward pressure on tuition, just as the mortgage lending boom led to rising home prices, they said, calling both examples of a “lack of underwriting discipline.”

Bernanke dismissed parallels between student lending and the subprime mortgage crisis at a town hall meeting with teachers last year.

“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 Aug. 7.

At their February meeting this year, the council said it supports the Fed’s monetary policy and that the recovery in interest-rate sectors like housing and auto sales is “especially encouraging.” Yet the council said there are “collateral consequences of current policy.”

The low interest-rate environment has helped cause “many to seek higher returns by accepting greater interest rate or credit risk,” the minutes said. “As the period of low rates is extended, these pressures have increased.”

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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