Asset Prices Will Collapse

It’s no secret that low rates have once again induced big banks and financial firms to make risky loans. While the problems in the housing market are nowhere near as severe as they were in 2008, they still exist. Banks are again turning to risky borrowers for sources of profit, and mortgages are being given to first-time home buyers with as little as 4% down. It isn’t variable rates resetting that we need to worry about this time; it’s that people will walk away from their home when economic conditions worsen because they have no skin in the game. Aside from the housing market, the other bubble that needs to pop is in the bond market and the stock market. Stock prices have been driven up in large part by repurchase programs on behalf of many corporations. Low rates have made it cheap to buy back shares and issue more debt. According to Bloomberg, companies in the S&P 500 spent 95% of their earnings on share repurchases in 2014 (Lu & Bost, 2014). Little to no money is being spent on capital expenditures, which begs the question “How can the economy continue to grow when investments aren’t being made?”


 

Works Cited

Wang, Lu, and Callie Bost. “S&P 500 Companies Spend Almost All Profits on Buybacks.” Bloomberg.com. Bloomberg, 6 Oct. 2014. Web.              04 July 2015.

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