WASHINGTON, USA

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 have been thought to be in a bubble:

The Standard & Poor’s 500 stock index has jumped about 26 per cent since the Fed announced, a year ago, that it would buy US$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 per cent. Stocks outside the United States have also surged as other central banks have followed the Fed with their own low-rate policies. Germany’s DAX is up 20 per cent, Japan’s Nikkei index 46 per cent.

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. “I am most worried about the boom in the US stock market” because of its disconnect from a “weak and vulnerable” economy, Robert Shiller, the Nobel Prize-winning Yale economist, told the German magazine Der Spiegel a few weeks ago. Shiller knows a bubble when he sees one. He accurately warned of both the tech and housing bubbles before they burst.

One key measure assesses stock prices relative to corporate profits. A healthy price-earnings (P/E) ratio is around 15 — or US$15 a share for each dollar of profit. The current P/E ratio is about 18.4, slightly above average but probably no cause to panic. Janet Yellen, nominated to succeed Bernanke, said last month: “If you look at traditional valuation measures… you would not see stock prices in territory that suggests bubble-like conditions.”

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 US markets.

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, DC. Fitch Ratings estimated in November that a worrisome 17 per cent of the US home market is overvalued, a risk because much of the buying is tied to investments and house-flipping. Coastal California is “approaching bubble-year peaks,” with Bay Area prices nearing the “environment in 2003,” Fitch said. Some leading forecasters have also warned of bubbles in London and areas of Canada and Norway. New York University economist Nouriel Roubini worries about bubbles in Switzerland, France, India, Indonesia, Turkey, Israel, and Brazil. These countries have accelerating prices, rising price-to-income ratios and huge proportions of mortgage debt as a share of total household debt.

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.

Over the past five years, the cost of Iowa farmland has rocketed 118 per cent to US$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.

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. “The bubble has been climbing,” said Dan Muhlbauer, a grain farmer who’s also a Democratic representative in the Iowa House. One ominous sign: The Environmental Protection Agency has proposed cutting ethanol blending requirements.

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 per cent in 1985 to less than 11 per cent. This decline in debt should protect many farmers if the value of cropland plunges.

— AP