Greenspan: Stocks Aren't Bubbling, 'Problem Basically Is Washington'

Friday, 29 Nov 2013 10:36 AM

By Dan Weil

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The biggest question for investors now seems to be whether the stock market has entered bubble territory. Former Federal Reserve Chairman Alan Greenspan says no.

And what makes him think that? The equity premium, "a measure of what the average investor requires the rate of return to invest in common stocks [is] still way below normal,” he told Fox Business Network.

"There are a lot of things that can go wrong,” Greenspan said. "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."

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

Meanwhile, the federal government's fiscal paralysis is stifling the economy, as evidenced by the record steepness in the yield curve, Greenspan says.

“The problem basically is Washington," he said.

"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.”

That indicates record uncertainty between investing for five years or 30 years, Greenspan says.

"The question essentially is where does that come from, and it’s basically in the business community and even in households — a major concern about how far out people can invest with some degree of security," he said.

As for Fed policy, Greenspan called the central bank's ultimate exit from its massive easing program "an experiment" that he "hopes" will work.

The only effect of the easing on average Americans has been to keep interest rates low, Greenspan says. Those low rates have curbed interest income while making homes cheaper.

“So long as that continues, this economy will remain dull," Greenspan said. "Demand for funds will remain dull. And the amount of borrowing, or lending by the commercial banks is going to be de minimis.”

Former White House Budget Director David Stockman begs to differ with Greenspan on the bubble issue.

The Fed has created a global problem, Stockman tells CNBC.

"The Fed is exporting this lunatic policy worldwide," he said. "Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere."

Meanwhile, MarketWatch chief economist Irwin Kellner says retail investors are showing strong skepticism about the stock rally, indicating they may be ready to sell.

"When I tell people that stocks are trading on corporate profits, their response is how much longer can business make money if consumers’ buying power is so poor and unemployment is so high," Kellner writes on MarketWatch.

When he cites Federal Reserve easing as supportive for stocks, "their reaction is that the Fed is reportedly ready to take the punch bowl away by reducing the amount of money it is injecting into the bond markets."

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

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