- - Friday, August 1, 2014

Good economic news hit the wires last week, with the wires humming a tune we haven’t heard in a while. There were 208,000 new jobs created in July, and the economy grew at 3 percent. So why did the stock market take this as a signal to sell?

Looking at the long-term economic indicators, more and more analysts see an asset bubble about to pop. When that happens, bad federal policies will take the blame.

Economists insist that we’ve been in a “recovery” for several years, but it has never felt like a recovery. Economic growth, job creation and productivity figures have ranged from mediocre to awful. President Obama insisted that he would revive the economy by spending $1 trillion on stimulus. The money is gone, and the economy is still bad.

True prosperity comes from innovation and investment. When labor is more productive, it’s worth it for employers to boost paychecks.

That’s not what we’re seeing now. Instead, the Federal Reserve is taking extraordinary measures to keep interest rates artificially low, masking the effects of massive government borrowing. Combine this policy with America’s corporate-income tax, the highest effective rates in the developed world, and companies borrow “cheap” money and keep profits overseas.

That produces highly indebted corporations flush with cash. When interest rates increase, as they invariably will when the Fed tightens monetary policy, this debt will suddenly be much more expensive to service. Balance sheets will be ugly.

Government policies are creating the next candidate for taxpayer bailout: the Federal Housing Administration. Originally created to help low- to moderate-income Americans buy houses, this agency now guarantees mortgages as large as $730,000, which is significantly higher than the $625,000 houses whose loans Fannie Mae and Freddie Mac backed before the housing collapse.

In 2006, the Federal Housing Administration guaranteed just 5 percent of mortgages. The latest figures from a study by Jordan Rappaport of the Federal Reserve Bank of Kansas City and Paul Willen of the Federal Reserve Bank of Boston show that this share had escalated to 44 percent by 2010. Worse, the Obama administration is pushing banks to further loosen lending standards, which was another major factor in the housing-sector meltdown the last time everything collapsed. This has led one bank, JP Morgan, to pull out of FHA financing altogether.

While the Fed will look to “employment cost” in deciding what to do in cutting back on monetary stimulus and raising interest rates, it’s not so much that wages rose by 1 percent that matters, but that productivity actually fell by 3 percent last year, and what happens this year. If productivity fails to rise, we could be stuck in stagnation because an employer cannot afford to pay more to an employee who isn’t more productive. The growing burden of regulations is holding back productivity.

The increasing dissonance between the stagnation in productivity and the bullish stock market suggests that an asset bubble is in the making, inflated by the Fed’s running the printing presses and the Federal Housing Administration’s goosing of the housing sector. The tax man’s greed and the bureaucrat’s hostile rules are likely to prick that bubble.