Banks Warn Bernanke Of The First Two Bubbles: Student Loans And Farmland

A panel of bankers warned the Fed in February that their extreme monetary policy is forcing institutions to "accept greater credit-risk" than "makes sense" and student debt and farmland prices are in a bubble. We first started to explain the bubble in student debt over two years ago and since then the bubble has become larger (and the underlying structure much more fragile as delinquencies soar). Farmland rose in price over 16% last year (according to the Chicago Fed) and has surged 8% per annum over the past decade. Credit risk is now at levels associated with the CDO-driven liquidity excess of 2006. "Further accommodation is not warranted," the minutes of this meeting show - uncovered by Bloomberg via the FOIA. The comments should cause Bernanke and his merry men to pause for breath but of course it is likely what he wanted all along. "Growth in student debt... has parallels to the housing crisis," and "agricultural land prices are veering further from what makes sense," are just two of the bankers' comments, adding that this "will ultimately result in higher loan losses," which is odd since every bank is adjusting down its loan-loss-reserves and juicing earnings.

 

The credit bubble...

 

The Farmland bubble...

 

The Student loan bubble...

 

Via Bloomberg,

A Federal Reserve panel of bankers warned policy makers in February that record stimulus was pushing financial institutions to take on more credit risk and creating a “bubble” in the price of U.S. farmland.

 

“The margin pressures that the low-rate environment has put on financial institutions, coupled with dramatically increased compliance and other infrastructure costs, have caused many to seek higher returns by accepting greater interest-rate or credit risk,” the bankers said on Feb. 8, following a Federal Open Market Committee meeting on Jan. 29-30.

 

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Bloomberg News obtained the minutes in a Freedom of Information Act request.

 

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Still, several bankers warned Fed officials in February that “uncertainty over health-care costs, tax policy, and the mounting U.S. debt” were among the reasons commercial and industrial loan growth remained “tepid” and credit lines were “chronically undrawn,” according to the minutes.

 

The panel also said in February that farmland valuations posed an asset-price bubble caused by unusually low interest rates, ...

 

“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.”

 

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Data compiled by the regional Fed banks have documented a 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.

 

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At a meeting in February 2012, the council said “growth in student-loan debt, to nearly $1 trillion, now exceeds credit- card outstandings and has parallels to the housing crisis.”

 

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, the council said.

 

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“Further accommodation is not warranted,” the bankers said, according to the minutes.

 

The advisory council warned of distorted bond prices resulting from the Fed’s purchases, limited impact on the economy, and “uncertain effects” from an eventual unwinding of the balance sheet, including “risks to price and financial stability.”

 

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“The combination of a sluggish economy and muted credit demand, very low interest rates, abundant bank capital and liquidity, reduced fee income and dramatically increased regulatory and compliance costs is causing some aggressive banks to lead a broader relaxation of risk/reward tolerances,” the council said.

 

“Aggressive pricing and looser underwriting, including extended terms and weaker transaction structures, are likely to persist and even get worse,” the bankers said in December 2011. “These accumulating risks, including interest rate risk mismatches, will ultimately result in higher loan losses.”

 

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