Greenspan Speaks About His Bubble / Legacy

Greenspan says that an end to the global liquidity glut will lead to lower asset prices… No shit, Sherlock, is the phrase that comes to mind on that quote. The asset/credit bubble is his baby, Alan’s Bubble, after all. Sounds like he’s trying to disown his child now. But, why would he do that, this one is going to make him famous. Just not the kind of famous he wants. Tragic. See continuation of this post for more:

The Times April 13, 2006

Greenspan warns of sharp falls in financial asset values
By Gary Duncan, Economics Editor

ALAN GREENSPAN, the revered former chairman of the US Federal Reserve, last night raised the spectre of sharp falls in prices for financial assets such as shares and bonds, which he argued were now too high.
In uncharacteristically stark terms that he rarely used in his time at the Fed, and which will send a shudder through investors around the globe, Mr Greenspan suggested that markets around the world were overvalued.

“Asset prices will fall eventually,” he predicted bluntly over a satellite link to a financial conference in Seoul, South Korea.

The former Fed chief blamed a global glut of spare capital for pushing up the value of shares and other assets.

He said that this had helped to drive down the equity premium — the extra return that investors demand for holding riskier assets such as equities — as well as real long-term interest rates. The result was that the market value of assets worldwide had been rising faster than the nominal growth in national incomes.

“That cannot go on indefinitely,” he argued.

Mr. Greenspan said that the situation would end when the amount of excess capital dropped. “I don’t know when the liquidity is going to decline, but I am reasonably confident that what we have is an abnormal situation,” he said. His comments echoed his famous 1996 warning over “irrational exuberance” in markets. However, asked yesterday whether the same diagnosis applied to present conditions, he said: “I would hesitate to use it in today’s context. Irrational exuberance, I think, would be a stretch at this point.”

Despite this, his latest cautionary words will still send a chill through investors. Equity markets in Britain, the United States and Europe recently have scaled five-year highs and worldwide share values are within striking distance of record highs.

The steep gains have prompted warnings of corrections from some analysts.

There are also fears that the “liquidity glut” to which Mr Greenspan referred yesterday has created a bubble in bond prices by artificially depressing yields in the market.

Like my blog? Want to get automatic email updates at a frequency YOU chose? Enter your email address at the top right of my blog and click “Subscribe.” The service is managed by and is private and SPAM-free.

Already receiving my blog via email? Don’t forget to click the “Promote This Story” link on posts you like (links are in the emails you receive).