Greenspan to FBN: Markets Aren't In a Bubble
Former Federal Reserve Chairman Alan Greenspan told FOX Business Tuesday that markets aren't in bubble territory and that Washington, D.C.’s muddled fiscal policy is causing uncertainty and curbing economic growth.
In an exclusive interview with FOX Business’ Peter Barnes, Greenspan pointed to the equity premium, “a measure of what the average investor requires the rate of return to invest in common stocks,” which he says is “still way below normal.”
“There are a lot of things that can go wrong,” Greenspan added, “but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.”
In his first interview on FOX Business, Greenspan declined to discuss specifics about current Fed monetary policy, but did call the Fed’s plans to exit five years of exceptionally low short-term interest rates and quantitative easing – bond purchases that have taken its balance sheet to $4 trillion -- “an experiment” that he “hopes” will work.
Greenspan said uncertainty among businesses and consumers stemming from concerns tied to the future of fiscal policy initiated in Washington, D.C., is holding back investment in the U.S. economy, as evidenced by the historic spread in long and short-term bond yields.
“Well, the problem basically is Washington … There’s very little doubt about that it is uncertainty that is affecting the very long term yield. For example, the spread between the 30-year Treasury on the one hand and the five-year note on other is the widest spread in American history,” Greenspan said.
“What that is basically saying is that the uncertainty between five years out and 30-years out is the greatest ever. And the question essentially is where does that come from and it’s basically in the business community and even in households – a real very, very major concern about how far out people can invest with some degree of security,” he told Barnes.
Greenspan, echoing some critics of the Fed’s easy money policies, said little if any of the impact from the central bank’s bond purchasing program has touched average Americans. Instead, he said the largest impact on average Americans from the Fed’s stimulus programs has been in keeping long-term interest rates low.
Meanwhile, banks have expanded their balance sheets with cash generated by the Fed’s easy money policies but been reluctant or unable to lend the money, he said.
“Because remember what happens when the Federal Reserve expands its balance sheet. It creates reserves in the hands of one or more commercial banks,” Greenspan said.
He added, “And the question is, why are they not being relent into the marketplace? Because that's basically the purpose of QE or any monetary expansion.”
Greenspan said uncertainty over future fiscal policy had tamped down demand for goods which has hindered lending and investment.
“So long as that continues, this economy will remain dull. Demand for funds will remain dull. And the amount of borrowing, or lending by the commercial banks is going to be dominimus,” he said.
Greenspan grew into an almost mythical figure during his 19 years at the helm of the Fed, preferring cryptic statements that suggested rather than outright declared the intentions of Fed policy makers.
Greenspan’s successor, Ben Bernanke, has taken the Fed in a very different direction, introducing numerous measures to increase transparency at the central bank and provide markets with more information regarding monetary policy.
Not least, Bernanke has introduced semi-monthly press conferences at which he patiently answers questions from the media for nearly an hour. A Greenspan press conference would have been almost unthinkable.
The Fed is heading into a critical period as it shifts leadership away from Bernanke to his likely successor, Janet Yellen, and attempts to guide markets through what could be a treacherous unwinding of the extraordinary stimulus policies introduced during the financial crisis.
Yellen, in testimony earlier this month before a Senate committee, also said markets haven't reached bubble territory. She cited the same measures as Greenspan.