Greenspan: Prices fall after risk-taking

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Greenspan: Prices fall after risk-taking

Flexibility key since assets 'invariably' decline after risk-taking; oil and gas no problem so far.

September 27, 2005: 4:38 PM EDT

WASHINGTON (Reuters) - Asset prices "invariably" fall after long periods of high risk-taking and a flexible economy is better able to withstand the inevitable blow, Federal Reserve Chairman Alan Greenspan said Tuesday.

The central bank chairman also said that greater economic flexibility has allowed the United States to weather higher oil and gas prices well so far.

"History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets," Greenspan told an economics conference in Chicago via satellite.

In a speech in which he once again defended the Fed's decision not to prick the late-1990s stock market bubble, Greenspan said a successful monetary policy can reduce economic volatility and lead to greater risk-taking.

But he said economic flexibility can help contain any fallout.

"Because it is difficult to suppress growing market exuberance when the economic environment is perceived as more stable, a highly flexible system needs to be in place to rebalance an economy in which psychology and asset prices could change rapidly," Greenspan said.

The Fed chief, who steps down from his post at the end of January after more than 18 years, said the ability of U.S. economy in recent decades to weather a series of shocks -- including the latest run-up in energy prices -- offered evidence of the U.S. economy's increased flexibility.

"That greater tendency toward self-correction has made the cyclical stability of the economy less dependent on the actions of macroeconomic policy makers, whose responses often have come too late or have been misguided," he said."

"It is important to remember that most adjustment of a market imbalance is well under way before the imbalance becomes widely identified as a problem," Greenspan added.

The remarks come a day after the Fed chief said that Americans have grown increasingly dependent on borrowing against the value of their homes to fuel spending.

In a separate speech to mortgage bankers Monday, Greenspan added that although mortgage debt is rising, most Americans have built up enough equity in their homes that they could weather a price drop without serious harm.