Blunt Greenspan warns of sharp global correction
16 April 2006
CHILLING TALK: Alan Greenspan says world markets are too high
ALAN Greenspan, the revered former chairman of the US Federal Reserve, this week 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, 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.
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 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 US 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.
AI
Market Data 
Markets 
