Is an­other eco­nomic bub­ble on hori­zon?

Austin American-Statesman Sunday - - PERSONAL FINANCE EXTRA - Su­san Tom­por

Just 10 years af­ter the fi­nan­cial cri­sis, many peo­ple find them­selves ask­ing the same odd ques­tion that a friend asked me last week when we met for cof­fee. “So, are we in a bub­ble?” A decade ago, of course, we faced such a deep, bru­tal fi­nan­cial cri­sis that we couldn’t imag­ine ever see­ing record stock prices or home val­ues again.

Mil­lions of peo­ple lost jobs in the most re­cent re­ces­sion. Mil­lions lost their homes.

Now oddly enough, many are ask­ing: “Are we in a bub­ble?” Se­ri­ously. The blue-chip in­dex fell by nearly 54 per­cent mea­sur­ing from its record close of 14,164.53 points on Oct. 9, 2007, to rock bot­tom at 6,547.05 points on March 9, 2009. But now the Dow is trad­ing close to 26,000.

Peo­ple who have money tucked away in mu­tual funds in a 401(k) — and those who own homes in com­mu­ni­ties where home prices have surged — are won­der­ing what’s next, as they’re see­ing record val­ues for much of their wealth.

Ev­ery­one, of course, isn’t flush with cash or even back where they started a decade ago.

If you don’t have a good pay­ing job any­more or you’re car­ry­ing a lot of debt, you’re not talk­ing about bub­bles. In­stead, you’re talk­ing about how to pay the bills.

“Half the pop­u­la­tion is a have and half the pop­u­la­tion is a have not,” said Mark Zandi, chief econ­o­mist for Moody’s An­a­lyt­ics, “If you’re a have not, none of this makes sense at all.”

The fi­nan­cial cri­sis in 200809 was built on a house of cards where way too many peo­ple were tak­ing on too much debt as they made can’t-miss bets on stocks or real es­tate.

While the U.S. econ­omy is about as strong as ever since the eco­nomic re­cov­ery be­gan nine years ago, many peo­ple aren’t en­gag­ing in spec­u­la­tive investing, Zandi said.

Con­sumers con­tinue to be con­fi­dent over­all and the la­bor mar­ket re­mains strong.

“The tight la­bor mar­ket is pro­vid­ing em­ploy­ment op­por­tu­ni­ties to more Amer­i­cans,” said Fed­eral Re­serve gov­er­nor Lael Brainard, who spoke Sept. 12 be­fore the Detroit Eco­nomic Club meet­ing at Ma­sonic Tem­ple.

Yet she also noted that the Fed­eral Re­serve’s as­sess­ment sug­gests that “fi­nan­cial vul­ner­a­bil­i­ties are build­ing, which might be ex­pected af­ter a long pe­riod of eco­nomic ex­pan­sion and very low in­ter­est rates.”

“Ris­ing risks are no­table in the cor­po­rate sec­tor, where low spreads and loos­en­ing credit terms are mir­rored by ris­ing in­debt­ed­ness among cor­po­ra­tions that could be vul­ner­a­ble to down­grades in the event of un­ex­pected ad­verse de­vel­op­ments,” Brainard said.

No­tably, she said, “lever­aged lend­ing is on the rise again.”

Charles Bal­lard, a pro­fes­sor of eco­nom­ics at Michi­gan State Univer­sity, said the risks as­so­ci­ated with cor­po­rate debt lev­els make him be­lieve that “we are ei­ther in a bub­ble or close to one.”

The surge in cor­po­rate debt is not as out of con­trol as the sub­prime mort­gage ex­plo­sion, he said. But he said it is wor­ri­some.

“Each of the last three re­ces­sions was pre­ceded by a big surge in cor­po­rate debt,” Bal­lard said. “Sure enough, in the last few years, we have had an­other big surge in cor­po­rate debt.”

What hap­pens next, of course, is any­one’s best guess.

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