August 30, 2005
Edmund Andrews Covers the Jackson Hole Conference
Greenspan Chides Investors - New York Times: Even as he was being praised for fostering two decades of rising prosperity, Alan Greenspan, the chairman of the Federal Reserve, warned on Friday that people have been unrealistic in believing that the economy has become permanently less risky. In the first of two speeches at a Fed symposium about the "Greenspan legacy," the Fed chairman implicitly took aim at both the torrid run-up in housing prices and at the broader willingness of investors to bid up the prices of stocks and bonds and accept relatively low rates of return. Both trends reflect what Mr. Greenspan said was the increased willingness of investors to accept low "risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent."
"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices," he said. "This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums." Mr. Greenspan also noted that consumers were more willing to spend money based on an apparent increase in wealth, rather than increases in their earnings, when part of that wealth was based on gains from stocks or real estate that could readily disappear....
Many Fed officials are expecting President Bush to decide on a successor this fall to give financial markets time to prepare and to allow the confirmation process to be completed in the Senate by the time Mr. Greenspan's term expires. The anxiety about a new Fed chairman reflects worries about Mr. Greenspan's nearly mythic reputation as the most powerful and effective central banker of modern times. But it also reflects the challenges that he will be leaving behind, among them issues being much discussed here like the United States' large current-account deficit and rapidly rising foreign indebtedness; the possibility of a major plunge in the dollar; and the prospect of today's big deficits swelling in the absence of fiscal discipline by either the White House or Congress.
President Bush has given no hint of his intentions. Almost all of the most widely rumored candidates were in Jackson Hole: Martin Feldstein, an economist at Harvard; R. Glenn Hubbard, a top former economic adviser to President Bush; and Ben S. Bernanke, a former Fed governor and the chairman of the Council of Economic Advisers. Another possible candidate, Lawrence B. Lindsey, a former director of Mr. Bush's National Economic Council, did not attend.
In his comments on Friday, Mr. Greenspan did not appear to be signaling a new desire by the Fed to pop a potential bubble in housing prices or to curb other forms of risk-taking. But he and a growing number of Fed officials do appear more intent on talking investors down from what they see as a potentially dangerous level of optimism and complacency. Housing prices have climbed far faster than overall inflation and far faster than household incomes for the last five years, partly in response to the Fed's policy of keeping interest rates low but also because of speculative behavior that is increasingly reminiscent of the frenzy over technology stocks just before the market bubble collapsed in 2000. But Mr. Greenspan was also alluding to a much broader pattern of economic behavior, an increased hunger among investors to look for higher profits wherever they might be and to pay higher prices for everything from bonds of Latin American nations to shares in risky hedge funds.
Mr. Greenspan's remarks also hark back to what he has called the "conundrum" of long-term interest rates declining even as the Federal Reserve has been systematically raising the overnight federal funds rate on loans between banks. The conundrum has been somewhat less in evidence lately, as interest rates on long-term 10-year Treasury bonds have edged higher. Still, long-term rates are no higher now than they were just before the Fed began raising overnight lending rates in June 2004.
Mr. Greenspan has adamantly insisted, despite criticism from some economists, that the Fed's job is not to pop speculative bubbles because bubbles are extremely difficult to define and because the Fed's tools - like a sharp increase in interest rates - could cause more damage to the economy than they might prevent. But his comments nevertheless did suggest that the central bank wants to preach a new gospel of caution that might damp what Mr. Greenspan once called the "irrational exuberance" of investors.
As he has many times in the past, but with somewhat more urgency in this speech, Mr. Greenspan pleaded for policy makers to resist the temptation to set trade and financial barriers to protect jobs from foreign competition. The openness and flexibility of the United States, he said, had allowed it to weather the shocks of terrorist attacks in 2001 with only a mild recession and had thus far allowed the country to endure the escalation of oil prices with little disruption. "The more flexible an economy, the greater its ability to self-correct in response to the inevitable, often unanticipated disturbances," he said.
The symposium here this weekend, a select gathering of about 100 economists and central bank officials, attracted an unusually stellar crowd, in part because it is the last such gathering before Mr. Greenspan steps down. Xiaochuan Zhou, governor of China's central bank, spent much of the day huddled in meetings with American and European officials. Jean-Claude Trichet, president of the European Central Bank, and Mervyn A. King, governor of the Bank of England, were here as well. Robert E. Rubin, Treasury secretary under President Bill Clinton, sang Mr. Greenspan's praises at lunch.
Posted by DeLong at August 30, 2005 03:35 PM