The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

The Economy should not be a game of Jeopardy

On February 25th, 2013, posted in: Uncategorized by

“Alex, I’ll take “Recent Economic History” for $1,000.”

“The answer is: ‘Federal Reserve Chairman Greenspan’s 1996 famous warning.’”

“What was that ‘irrational exuberance’ could cause a serious crash in asset values and cause profound damage to the economy.”

“That is correct – still your turn.”

Interestingly, as a result, we have an economy in Double Jeopardy.

That’s right; just a few years back the fears were that the very low interest rates of the time would fuel asset inflation. That means that your real estate didn’t really raise in value, rather was inflated by a cheapened dollar, i.e. we got duped.

After warning of such a phenomenon in the mid 90s, Mr. Greenspan didn’t heed his own prophetic word and proceeded to keep interest rates very low for what many believe was way too long. The results of his inaction sent consumers on a borrowing binge that hyper-inflated real estate assets. Home prices went wild. So did government spending. Why not, our debt was at really cheap rates – so finance more of it to feed the beast – both at the consumer level and in the halls of congress.

And the moral of the story is that Mr. Greenspan was right and (here’s a surprise), it certainly appears that we’re looking to do it all over again.

Some research shows that farmland prices were rising at a 13% clip during the fall of last year, just after a serious drought ravaged the Midwest. Uh-oh. Could it be that cheap borrowing rates inflated the values? Isn’t the same thing happening with housing again? Much like the early 2000s, our housing values are climbing. Not long ago, they were moving the opposite direction. Rates have motivated qualified borrowers to jump back in the game. It’s not the gold rush of ’49, but things are percolating again.

Also, the longer the current near-zero interest rate monetary policy prevails, so will be the difficulty in climbing down from the mountain of debt our government continues to create. If debt service costs go up, we got us a real quandary. Forget deficit… think debt. That might be uglier to overcome in future years.

So here we are again. If Mr. Bernanke (Greenspan’s successor) raised rates to tighten up on the money spigots that are again flowing, it would require major courage. Let’s face it, political outrage would ensue. But, the longer he goes without raising rates the greater the likelihood of severe consequences rearing its ugly head.

I’ve said more than once in this blog over the years that low rates were good for prime borrowers. The rest of us – savers, those living off of fixed incomes, and people with less than pristine credit – are all paying the price.

The stock market is inflated because safe investments yield near-zero or even negative returns based on how one measures inflation. So here we go again. Real estate is up, the stock market is up and rates have been (and will be) low for an exceedingly long time.

So what’s the Final Jeopardy category? “History That Repeats Itself.” Let’s hope not.

No Responses to “The Economy should not be a game of Jeopardy”

Leave a Reply