Greenspan policies `may lead to crash'

ALAN GREENSPAN, the revered head of the United States central bank, the Federal Reserve, has "mismanaged" the recent economic boom, one of the key advisers to John Major's government said today.

The booming US financial markets face a double threat from an over-heating economy and an unsustainable balance of payments deficit, warned Professor Tim Congdon, of city analysts Lombard Street Research.

The professor, one of the "Wise Men" who advised the then Chancellor Kenneth Clarke, said there was a danger of a Wall Street crash if investors stopped buying American assets. "Sooner or later international investors will refuse to buy [US] assets on a sufficient scale and the longer the current account deficit keeps on widening, the worse the adjustment when it eventually comes," he said. "Mr Greenspan is still being lionised ... but he and his colleagues have mismanaged the boom of the late 1990s. If Mr Greenspan does not take action soon, international investors will have to do it for him."

The Fed signalled last week that it plans to raise rates early in the New Year. The speculation intensified days later after official figures revised third quarter growth to 5.7 per cent from an already meteoric 5.5 per cent.

In a paper published today, Professor Congdon accused US policymakers of "complacency" for not acting sooner when they realised the recovery in domestic and Asian markets was stronger than expected. He said low interest rates had only been justifiable when the US was acting as "consumer of last resort" while the rest of the globe was close to recession.