WARNINGS ON U.S. ECONOMY

[Anonymous]

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
optimism.

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
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’s throwing out a yellow flag of
caution.

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
said.

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
Future.”

“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
chairman.

[Author]

August 29, 2005 at 10:04 AM