Fed 'powerless to prevent US shares bubble'

Alan Greenspan, who six years ago branded share price values as "irrational exuberance", yesterday insisted the US Federal Reserve Board could have done nothing to avert a stock market bubble.

The chairman of the Fed said hikes in interest rates directed at deflating a share price bubble could simply trigger a wider economic slump.

Mr Greenspan has been accused of creating the conditions for the current US recession by failing to tackle the boom in asset prices.

But Mr Greenspan told a high-profile economic conference meeting in Jackson Hole, Wyoming yesterday: "No low-risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble."

The economy boomed during the decade and the business cycle of expansion and contraction became less volatile, leading investors to pour ever-increasing amounts of money into stocks in the belief that earnings would keep rising, he said.

But he told the symposium, which was sponsored by the Kansas City Federal Reserve, that the Fed could not be sure a bubble was developing because IT investment had raised the level of US productivity.

"It was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity, the very outcome we would be seeking to avoid," he said.

Mr Greenspan used a speech in December 1996 to ask whether the Fed would know if "irrational exuberance" had taken hold of investors.

In July 1999 he warned Congress that productivity acceleration could not alone ensure stock prices were not too high.

Yesterday, Mr Greenspan said the Fed would have to change the mindset of investors to relieve an asset price bubble.

But he added: "Prolonged periods of expansion promote a greater rational willingness to take risks, a pattern very difficult to avert by a modest tightening of monetary policy."

He did not comment on current economic conditions other than to say that the recent recession was "relatively mild".

The Fed's open market committee meets on 24 September. At its meeting a fortnight ago, it said the risks were weighted towards contraction, which was seen as hint it could cut rates soon.

There was mixed evidence of the state of the economy from figures published yesterday. Manufacturing in the industrial Midwest rose for the seventh month in a row in August.

The pace of growth accelerated sharply, said the National Association of Purchasing Management in Chicago.

Government data showed personal spending surged 1.0 per cent in July, the biggest since last October, on the back of car sales.

But the confidence of the average American fell to its lowest level since November. The University of Michigan's final August consumer sentiment index fell slightly and disappointed forecasts for a rise.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Loren Hughes: Commercial Finance Analyst

£55,000 - £60,000: Loren Hughes: Are you a newly qualified accountant from a B...

Neil Pavier: Commercial Finance Manager

£65,000 - £75,000: Neil Pavier: Have you every dreamt of working for a global ...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Neil Pavier: Commercial Finance Manager

£55,000 - £65,000: Neil Pavier: Do you want to work for an impressive digital ...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower