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"
- Money Morning:
The Scary Reality of the Student Loan Bubble in 5 Charts
- Money Morning:
Investing in Farmland: Is a Bubble Brewing?
Can Farmland Values Continue Dramatic Climb in 2013?
- Bloomberg News:
Bankers Warn Fed of Farm, Student Loan Bubbles Echoing Subprime