Obama White House Is on Economic Bubble Alert

President Barack Obama, who took office amid an epic financial collapse, wants to make sure the economic recovery he’s helped engineer doesn’t set the stage for the next bubble. While the president has frequently talked about the need to move beyond what former White House economic adviser Jared Bernstein called a “shampoo economy” (as in lather, rinse, repeat), the topic of overheated markets has moved front and center once again. Obama this month spoke four times in five days of the need to avoid what he called “artificial bubbles,” even though the economy grew at just a 1.7 percent rate in the second quarter and employment and factory usage remain below pre-recession highs. “We have to turn the page on the bubble-and-bust mentality that created this mess,” he said in his Aug. 10 weekly radio address.

Six years after the housing meltdown ignited the worst recession since the 1930s and vaporized $16 trillion in American household wealth, real estate and equity markets are roaring again. Home prices are surging in places such as Las Vegas and Phoenix. U.S. stocks are near record highs, with the Standard & Poor’s 500-stock index up about 16 percent this year. In the past year investors’ use of borrowed money to buy stocks is up about one-third, to a near record. American companies have issued about $240 billion in junk bonds this year, more than twice the amount during the same period in 2007. “Clearly, this is a growing concern both in the administration and at the Fed,” says Adam Posen, a former member of the Bank of England’s monetary policy committee.