The chairman of the Federal Deposit Insurance Corporation, Sheila Bair, spoke today in Baltimore at a meeting of the Risk Management Association. Highlights of her prepared remarks:
Over the past dozen years or so, the United States has experienced classic asset price bubbles in the stock market and the housing market. Where might asset bubbles be forming today?
One candidate is U.S. farmland values, which remain some 58 percent above their 2000 levels in inflation-adjusted terms. Strong agricultural conditions have spurred renewed interest in farmland on the part of investors. But today's positive fundamentals are subject to change. A sharp decline in farmland prices similar to the early 1980s could have a severe adverse impact on the nation's 1,579 farm banks. While the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring.
Unless both monetary and fiscal policy are well managed and well coordinated, there is the risk that market expectations for future inflation could rise sharply, pushing interest rates higher all along the yield curve.... Bankers and regulators should place heightened scrutiny on the interest-rate exposures on the balance sheets of financial institutions, and ensure that these institutions can withstand interest-rate increases of as much as 500 basis points over a two- to three-year period.
Regular readers know I am not a big Bair fan, and as a general matter I am skeptical that government officials can accurately judge what is a "bubble." If you own a lot of farm land, it has to be infuriating to see a government official running around declaring that it may be overvalued. And if you are the chairman of the Federal Reserve, you can't be particularly particularly thrilled to see Ms. Bair running around warning of a replay of 1970s inflation in which interest rates are going to rise 5 percentage points in two years.