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 user 2005-08-29 at 10:05:00 am Views: 46
  • #12600

    Greenspan Issues Warnings on Economy

    Says Budget and Trade Deficit Threaten Long-Term Fiscal Health

    JACKSON, Wyo. (Aug. 05) -
    Federal Reserve Chairman Alan Greenspan on Friday cautioned Americans
    against thinking the value of their homes and other investments will
    only go higher, saying “history has not dealt kindly” with that kind of

    Greenspan also said that bloated trade and budget deficits threaten the long-term health of the U.S. economy.

    His warnings, made at a high-profile economic policy conference, came
    as the Fed chief and prominent economists pondered his 18 years at the
    central bank and the legacy he will leave. He is expected to step down
    in five months.

    Rising house and stock prices have made many people feel more wealthy
    and have helped to support consumer spending, a key ingredient of the
    economy’s good health.

    Greenspan, however, said 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. “Any onset of increased investor caution” could cause home and
    stock prices to drop, he noted.

    A long spell of low interest rates and low risks for investors has
    especially encouraged investment in homes. Greenspan worried about what
    would happen if that climate were to change.

    “History has not dealt kindly with the aftermath of protracted periods of low-risk premiums,” he said.

    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 fall suddenly or if interest rates were to rise
    rapidly, some local housing markets, homeowners and lenders could get

    “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’s throwing out a yellow flag of

    Sinai and others believe Greenspan was strengthening his warning about
    the booming housing market. But they didn’t think 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.

    “He’s staying with the position he had before. There are local bubbles
    but no national bubble,” Allan Meltzer, a Carnegie-Mellon University
    professor, said in an interview.

    On Wall Street, the Dow Jones industrials lost 53.34 points to close at 10,397.29.

    Stock prices and house prices are factors that Fed policy-makers are
    increasingly needing to consider when setting interest-rate policy,
    Greenspan said. “Our forecasts and, hence, policy are becoming
    increasingly driven by asset price changes,” he 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 rupture
    and wiped out trillions of dollars in paper wealth.

    Maintaining economic flexibility is especially important, Greenspan
    said, to deal with what he called some of America’s economic
    imbalances: the swollen account trade deficit, which surged to a record
    $668 billion last year, and the housing boom.

    “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,” he

    Teamsters President James Hoffa took issue with Greenspan’s comments that trade protectionism is a threat to the economy.

    “I think Alan Greenspan is wrong,” Hoffa said in an interview with The
    Associated Press in Washington. “Teamsters unions and machinists have
    seen thousands and thousands of jobs go overseas that are never coming
    back” due to “unwise trade agreements.”

    Job loss, Greenspan said, should be addressed “through education and
    training, not by restraining the competitive forces that are so
    essential to overall rising standards of living of the great majority
    of our population.”

    Greenspan said that “fear of change” is behind stalled international
    trade negotiations and the hesitancy of Congress and the White House to
    “face up to the difficult choices that will be required to resolve our
    looming fiscal problems.”

    In the past, Greenspan has urgently called on policy-makers to shore up
    Social Security, saying a big wave of baby boomers starting to retire
    in 2008 will put massive strains on the system and if not fixed can
    imperil the overall economy.

    Greenspan’s remarks were to a conference, sponsored by the Federal
    Reserve Bank of Kansas City, called “The Greenspan Era: Lessons for the

    “The Greenspan era gets extraordinarily high marks,” said John Taylor,
    professor at Stanford University. Those thoughts were echoed by many
    others attending the conference.

    Greenspan’s appearance at the annual two-day conference, which is
    attended by Fed policy-makers, economists, academics and central bank
    officials from around the world, is expected to be his last as Fed