Tags: AEI | bubble | farm | private

AEI Experts Look at Bubble Economy

By    |   Wednesday, 02 Apr 2014 07:57 AM

In 2007, after I had introduced the principles, the American Enterprise Institute (AEI), at the initiative of Alex Pollock, began a series of semi-annual conferences to assess the course of the housing bubble that was coming to a head and other consequences of the open-handed policies of the Treasury and Federal Reserve. On March 27, AEI one of these conferences, titled "Are the Bubbles Back?"

At this conference, two of the experts found evidence of a new bubble forming in farmland, although they were uncertain as to whether it would have consequences for the broader economy.

Jay Brinkmann, former chief economist of the Mortgage Bankers Association, astutely spotted a bubble in the run-up of Fannie Mae stock after private equity funds got behind it, which Brinkmann said reminded him of a twist of a proverbial question, "If you're so rich, why aren't you smart?"

Brinkman gave his assessment of the pending legislation in which the private equity funds would bring the highest paid lawyers around to bear on the question of whether having bailed out the government-sponsored enterprises, the government owes it to the private equity investors to credit them with equity in the business. In effect, according to Brinkmann, the private equity funds are arguing that they've paid the government back with the government's own money. The private equity fund's lawyers think they've found a loophole in the documents. (I recall that in the aftermath of the savings and loan bailout, an S&L that was seized managed to force the government to live up to its bailout deal, so this one might be worth a shot.)

Mark Fogarty, editorial director of SourceMedia's Mortgage Group, said there is a bubble in the 20 percent growth of the market for farm mortgages since 2010.

Mark Carey, a senior adviser in the division of international finance of the Federal Reserve Board of Governors, expanded on this idea, recalling that there was a bubble in farmland in the 1980s financed by mortgages from the Farm Credit Service that were implicitly guaranteed by the federal government. He sees an even greater bubble now, once again financed by the Farm Credit Service, and he lamented that apparently "the organizational lessons haven't been learned." (A cynic such as me might suggest that the Farm Credit Service, having been bailed out after the last bubble burst, has learned it will be bailed out again.)

Desmond Lachman of AEI, formerly with the International Monetary Fund, questioned whether a farm bubble would be problematic, but he ventured that there could be a bubble in Treasury securities, because spreads tend to remain persistently narrow no matter what the news is.

At this point, Carey made his point that one of the challenges of bubbles is determining when they're systemic. At one point it was assumed (he could have said, by the Fed staff), that the bursting of the subprime mortgage bubble would have no consequences beyond the housing industry.

Pollock suggested that to determine whether a bubble is of systemic significance it is necessary to look at the interaction among credit, incomes and asset prices.

Christopher Whalen of Indiana State University's Networks Financial Institute made the profound observation that the narrative in Washington has changed from one of the government versus the private sector to one in which former monopolies have mutated into public-private partnerships. Thus the government-sponsored enterprise has become the model for the "too big to fail" financial institutions.

(Archived video and panelist presentations, with slides, can be found here.)

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Robert-Feinberg
On March 27, AEI one of these conferences, titled "Are the Bubbles Back?" At this conference, two of the experts found evidence of a new bubble forming in farmland, although they were uncertain as to whether it would have consequences for the broader economy.
AEI,bubble,farm,private
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2014-57-02
Wednesday, 02 Apr 2014 07:57 AM
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