(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…
If inflation levels remain higher than you like, simply regulate inflation out of existence, right? This logic appears to be the approach of the Venezuelan government as it seeks to curb what it sees as rampant speculation and unfair business practices. According to Nightly Business Report, inflation was 27% last year in Venezuela. The proposed Law for Fair Costs and Prices will create the Superintendence of Costs and Prices that will determine the prices of certain products in an effort to curb inflation. The law bolsters existing price control efforts.
Look for inflation to get worse, black markets to grow, and scarcity of goods to get more severe. It seems to me Venezuela is going after symptoms rather than causes.
For more detail, see “Analysts: Pending price-control law could backfire.”