Greenspan concerned about future of economy
JACKSON, Wyo. – Creeping trade protectionism and bloated budget deficits pose a risk to the United States’ long-term economic vitality, Federal Reserve Chairman Alan Greenspan warned Friday.
“Developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset: the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks,” the Fed chief said in a speech to an economic conference here, sponsored by the Federal Reserve Bank of Kansas City.
Maintaining economic flexibility is especially important, Greenspan said, to deal with what he called some of America’s current economic imbalances: the swollen current account trade deficit, which surged to a record $668 billion last year, and the housing boom.
Greenspan also worried in his speech about what will occur with the ending of the recent sustained period of low interest rates and low risks for investors.
“History has not dealt kindly with the aftermath of protracted periods of low risk premiums,” he said in his remarks.
Rising stock and home prices have made households feel wealthier and has helped to support consumer spending, a key ingredient of the economy’s good health. But Greenspan sounded a stronger note of caution that people shouldn’t count on that paper wealth, which can evaporate if economic conditions deteriorate rapidly.
“What they perceive as newly abundant liquidity can readily disappear,” he said. “Whether the currently elevated level of wealth-to-income ratio will be sustained in the longer run remains to be seen.”
Low interest rates have powered the booming housing market. Home sales have hit record highs four years in a row and house prices are surging. In previous speeches, Greenspan has warned of “froth” and “speculative fervor” gripping some local housing markets.
If house prices were to suddenly fall or if interest rates were to rise rapidly, some local housing markets, homeowners and lenders could get clobbered.
“Greenspan is giving individuals ample warning that they need to take that into account,” Allen Sinai, chief global economist at Decision Economics, said in an interview.
He and others believe Greenspan was strengthening his warning about the booming housing market.
But they didn’t believe he was signaling a new concern about the development of a national housing price bubble. Instead, they said, he seemed to be stressing his oft-stated worries about bubbles in local housing markets.
Stock prices and house prices are factors that Fed policy-makers are increasingly needing to consider when setting interest-rate policy. “Our forecasts and, hence policy, are becoming increasingly driven by asset price changes,” Greenspan said.
During the high-flying stock market days of the 1990s, the Fed chief in December 1996 famously questioned whether Wall Street investors were engaging in “irrational exuberance.” Despite the warning, stocks continued to soar. In 2000, the stock market bubble began to burst and wiped out trillions of dollars in paper wealth.