(Hat tip to a friend who pointed me to this article)
Under Alan Greenspan, the Federal Reserve was known to stand on the sidelines while bubbles in asset prices grew and grew. Greenspan had a lot more faith in the Federal Reserve’s ability to mop up the subsequent mess caused by a bubble’s collapse than in its ability to stop a bubble, much less identify one.
It seems times have changed. On October 13, Businessweek chronicled the Fed’s efforts to make sure that soaring prices in agricultural land do not lead to another messy bubble and economic calamity. Prices have indeed soared across the midwestern United States:
“The Kansas City Fed reported land values were 20 percent higher than a year ago. The Chicago Fed reported a 17 percent increase in its district, the fastest increase since the 1970s. Nonirrigated farmland in the Minneapolis Fed district increased 22 percent in price.”
The factors driving these increases are the same as I reported from a related Planet Money piece: “Land prices have doubled in Iowa over the past few years“: “elevated crop prices, soaring farm income, and record-low interest rates.”
As a result, nervous regulators are demanding rigorous stress tests of banks up to their gills in agricultural loans. Businessweek also reports that regulators are “…scrutinizing the lending standards, loan documentation, and risk management at the country’s 2,144 agriculture banks.”
I will be very interested in the outcome of all this scrutiny. The same Federal Reserve that helped create record low interest rates is working to ameliorate the impact of those very same interest rates. This episode is a reminder that flooding an economy with liquidity does not produce equal outcomes for all sectors. Recovery and prosperity does not even need to appear in the sectors most impacted by the malaise the Federal Reserve scrambles to repair. Instead, the money tends to collect where it will generate the highest returns due to other economic factors. Currently, it seems that the bet is on farming. I believe the Federal Reserve was aiming for housing…
A contraction in credit has served as a firm pillar of support for those who still fear deflation is the biggest threat to the U.S. economy. It seems even that pillar is slowly but surely weakening. In “Behind a Rise in Auto Sales, Easier Credit“, the New York Times reveals that loosening credit standards and increased lending have helped boost auto sales over the past year. Michael E. Maroone, the president of AutoNation, is cited as claiming that increased credit was the most important driver of auto sales last year. The statistics from this detailed article are a vivid reminder of how fast consumer borrowing can recover under the right conditions.
Consider these statistics quoted from the article:
- Sales of new cars rose 11 percent, to around 11.4 million, in 2010 and are off to an even stronger start this year.
- More than 859,000 new cars were sold to consumers with a so-called subprime credit rating in 2010, a nearly 60 percent increase from the year before.
- [The packaged consumer loan] market stood at $36 billion in 2008, during the throes of the crisis, but by 2010 it had bounced back to almost $58 billion. Bankers and analysts project that could rise by as much as 15 percent in 2011.
- Over all, lending to subprime borrowers has risen to about 38 percent of the auto finance market, although it is still well below its precrisis highs when it made up nearly half of all loans.
As the NYTimes notes, “…the gradual expansion of credit in virtually every area except real estate is an important sign that the American economy is returning to health.” So while an obsession with housing statistics can mire one in deflationary blues, so many other corners of the economy are flashing much different signals.
The reflation of the financial industry continues. Last week, Citigroup’s CEO Vikram Pandit got his salary restored from the recession-related, punitive $1 level. He is now earning $1.75M per year. Goldman Sachs has joined the reflation and then some. Goldman’s CEO Lloyd C. Blankfein got a 2011 pay package including a 233% pay raise to $2M. Other executives were also granted generous increases in their pay packages. For more details see “Goldman Sachs Gives Blankfein a Big Raise.”
While this revival of largess may never trickle down toward the masses of unemployed and underpaid, it is once again difficult to imagine that deflation is an imminent threat when bankers are being restored to previous glory!
Hopefully, by now, you have been disabused of the notion that deflation remains a serious and imminent threat for the U.S. (or global) economy. Certainly, Vikram Pandit, Citigroup CEO, knows all about inflation’s positive benefits.
After reporting an incredible $10.6 billion in profits last year, Pandit was rewarded with a 75% pay hike. His base salary went from a mere $1 to a more appealing $1.75M. Pandit froze his salary at $1 in response to the severe recession that almost wiped out the bank before the U.S. government bailed it out.
More details in Bloomberg: “Citigroup Boosts Pandit’s Base Salary to $1.75 Million From $1.” This article also references the bonuses paid out to several other Citigroup executives.
China surprised financial markets by again raising requirements for bank reserves sooner than expected. More tightening is expected as Chinese banks continue to lend at a torrid pace. Read more at “China Lifts Banks’ Reserve Requirements Again.”
Citbank, whose parent company received tens of billions of dollars of taxpayer bailout funds, has decided to charge some of its poorest checking-account customers a monthly fee:
Starting in February EZ or Access checking accounts will be charged $7.50 a month unless they maintain a $1500 balance. The monthly fee used to be waived if customers set up direct deposit for paychecks–or had two automatic bill pays. “When I opened this account they told me it was going to be free. Then what happens a month later? I get charged about $7,” said Moussa Gueye of New Haven…. Citibank isn’t the first to raise fees. In June, Bank of America raised its monthly fee by $3.