Former Fed chief Alan Greenspan says record highs on US stock market is not a bubble
Former Federal Reserve Chairman Alan Greenspan said the US economy probably will grow more slowly next year than some forecasters predict and indicated that a record US stock market is not a bubble.
“This does not have the characteristics, as far as I’m concerned, of a stock market bubble,” Greenspan said in an interview on Bloomberg TV, due to air this weekend.
“It could come out that way but I don’t see it at this stage,” he added.
Greenspan said that even with the rise in equities, the US economy is restrained by a “degree of uncertainty” that is reducing investment.
Economists who forecast 2.5-3% growth next year may be too optimistic, he said.
Greenspan said his 2014 growth forecast is “closer to 2%”. That is below the median estimate for a 2.6% expansion next year after a 1.7% growth this year, according to a recent Bloomberg survey of 73 economists.
Greenspan said the US economy is being held back in part by the banking system, as some of the largest banks are not operating efficiently.
“We’re supporting banking institutions who are not only very large, but not very efficient and they are using the scarce savings of the society, which is critical for economic growth,” he said. He declined to identify which banks had become inefficient.
On Wall Street, the Standard & Poor’s 500 Index has rallied about 27% this year, heading for the biggest annual gain since 1998, as the Fed has pressed on with its stimulus campaign. The S&P 500 rose 0.3% to a record 1,807 yesterday in New York, while the Dow Jones closed 0.2% higher at 16,097, also an all-time high.
US equity markets will be closed today for the Thanksgiving holiday.
“The stock price generally goes up about 7% a year for the long term,” Greenspan said. “It didn’t go anywhere since October 2007 and the result of that is we’re just now breaching that. We have had no growth in stock prices for years.”
The S&P 500 reached 1,565 on October 9, 2007, and then dropped 57% as the US economy went through the longest and deepest recession since the Great Depression. The index did not surpass its October 2007 peak until March of this year.
Greenspan also offered praise for Janet Yellen, the nominee to be the next Fed chairman. She was approved by the Senate Banking Committee with a vote of 14-8 on November 21 and now heads to the full Senate.
Yellen, 67, was a governor at the Fed from 1994 to 1997 under Greenspan and became president of the San Francisco Fed during the final years of Greenspan’s tenure, which ended in January 2006. She is currently the Fed’ss vice chairman.
Greenspan, 87, said he has ‘praised her because she’s very good”. He said her greatest challenge will be managing the Fed’s balance sheet, which has grown to $ 3.91 trillion under its bond-buying programmes designed to lower unemployment.
“Eventually we’re going to have to stop expanding and start bringing it in,” Greenspan said. “That process is going to move interest rates higher, by an indeterminate amount, and that is going to create major problems for the Federal Reserve as it always has politically”..