"Developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset: the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks," said Greenspan at an economic conference in Jackson Hole, Wyo., reported the Associated Press.
Maintaining economic elasticity is key in the face of the swollen current account trade deficit, which surged to a record $668 billion last year, and the housing boom, he said.
Greenspan also noted that the Federal Reserve is paying more attention to the rising value of assets such as stocks and homes, as low interest rates encourage more risk-taking, Bloomberg News reported.
Investors are willing to accept ever-lower compensation for risk, as a long period of economic stability leads to the belief that dangers to their investments have lessened, Greenspan said. While that has helped push asset prices higher and supported increased consumer and business spending, he continued, market participants should not take such stability for granted.
If investors become more cautious, interest rates could rise and asset values could decline, posing a risk to the economy, he said.
Greenspan's comments that investors may be overconfident in the stability of the U.S. economy, thereby driving up asset prices, reflects his "risk management" approach to monetary policy, according to Bloomberg News.
Monetary policy-makers should look at forecasts produced by economic models, he said, but they must also consider possible deviations from those forecasts and the possible consequences. Then, they should take action to prevent the most dire consequences.
Greenspan's speech was made during a conference titled, "The Greenspan Era: Lessons for the Future."
The chairman, who has steered the world's largest economy for 18 years, plans to step down Jan. 31.
-- Compiled from wire reports and other media sources
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August 26, 2005, 4pm EDT
