WASHINGTON — The Federal Reserve’s super-low interest-rate policies have inflated a slew of dangerous asset bubbles. Or so critics say.
They say stocks are at unsustainable prices. California homes are fetching frothy sums. Same with farmland, Bitcoins and rare Scotch.
Under Chairman Ben Bernanke, the Fed has aggressively bought bonds to try to cut borrowing rates and accelerate spending, investing and hiring. Its supporters say low rates have helped nourish the still-modest economic rebound.
Yet some say the Fed-engineered rates have produced an economic sugar high that risks triggering a crash akin to the tech-stock swoon in 2000 and the housing bust in 2006.
On the eve of the Fed’s latest policy meeting Tuesday and Wednesday, here’s why — or why not — these five assets might be in a bubble:
Stocks
The Standard & Poor’s 500 stock index has jumped about 26 percent since the Fed announced a year ago that it would buy $85 billion in bonds each month. And since the Fed’s first round of bond buying at the end of 2008, stocks have soared 124 percent. Stocks outside the United States have also surged as other central banks have followed the Fed with their own low-rate policies.
Why it’s a bubble: By artificially depressing bond yields, the Fed has led more investors to shift money into stocks. Such a flood of cash can swell share prices without regard to corporate earnings. Once the Fed unwinds its support, many investors could abandon stocks and send shares tumbling.
Why it isn’t: One key measure assesses stock prices relative to corporate profits. A healthy price-earnings ratio is around 15 — or $15 a share for each dollar of profit. The current P/E ratio is about 18.4, slightly above average.
Housing
The last housing bubble ignited the worst economic catastrophe since the Great Depression. Home prices became inflated in part from an influx of cash and low rates driven by the Fed and other central banks. And in recent months, prices have again soared in some hot U.S. markets.
Why it’s a bubble: It depends on location, location, location. All-cash sales, low rates and tight supplies have lifted prices in areas like New York City and Washington, D.C. Fitch Ratings estimated in November that a worrisome 17 percent of the U.S. home market is overvalued, a risk because much of the buying is tied to investments and house-flipping.
Why it isn’t: At least in the United States, some safety valves are in place that didn’t exist during the previous housing bubble, Roubini wrote this month. Lending standards are tighter. Banks are cushioned from possible losses from greater capital in reserve. And homeowners have more home equity this time.
Farmland
Over the past five years, the cost of Iowa farmland has rocketed 118 percent to $8,400 an acre, according to the Agriculture Department. Prices have more than doubled, too, in Kansas, Nebraska and North Dakota. The prices recall a 1970s-era boom. That ended with a bust that put many family farms into foreclosure, leading musicians such as Willie Nelson to start the Farm Aid benefit concerts.
Why it’s a bubble: The Fed’s low-rate policies have encouraged farmers to expand their holdings over the past five years. Ethanol subsidies led them to plant more corn as prices for that crop rose during the past three years.
Why it isn’t: Unlike during the 1970s bubble, farmers haven’t become “over-leveraged” with debt, Esther George, president of the Kansas City Fed, noted last summer. The percentage of farmers’ assets financed with borrowed money has dropped from 22 percent in 1985 to less than 11 percent.
Bitcoin
Critics fear that the Fed’s low rates are undermining the dollar’s value. For some, the hot new choice is an Internet-based currency called Bitcoin. Because there’s a finite supply of 21 million Bitcoins, devotees say the currency will continue to appreciate. The value of a Bitcoin relative to the U.S. dollar has surged at an average pace of 292 percent a year, according to a Bank of America analysis.
Why it’s a bubble: Prices are insanely volatile. They jumped 50 percent on Nov. 18 after regulators signaled that digital currencies could be acceptable. They plunged 30 percent on Dec. 5 after China’s central bank banned Bitcoins as currency, according to the online exchange Mt.Gox.
Why it isn’t: Bitcoin may become a useful commodity in the future economy. Its digital nature could make it easier for immigrants to send money back home. It could charge lower transaction fees than credit cards, saving retailers money.
Scotch
Rare decades-old Scotch could give investors a terrible hangover. Over the past five years, prices have shot up 170 percent, according to an index of auctions and sales by the Scotland-based firm Whisky Highland. It’s among the investments that have grown more alluring as interest rates have fallen.
Why it’s a bubble: Regardless of how high someone bids, Scotch still tastes the same. It generates returns by appreciating in price, not producing income as stocks, bonds or real estate can.
Why it isn’t: What inflates bubbles beyond rationality is greed. Most buyers acquire Scotch for other reasons: the allure of the taste, the thrill of the chase, the pursuit of status.