Alan Greenspan is trying to tell us something. He can be a tough fellow to decipher, but in this case his message seems clear:
This may be a good time to pull in your horns. Don’t bet too recklessly on the future.
The chairman of the Federal Reserve had some sober comments in an Aug. 26 swan song before economic bigshots at an annual Fed getaway in Jackson Hole, Wyo. It was his last speech to that group, because he’s retiring at the end of January.
Greenspan has become a one-man personification of the American economy in his 18 years at the Fed. “We think he has a legitimate claim to being the greatest central banker who ever lived,” wrote two Princeton economists in a paper that was presented with a perfectly straight face at the conference.
Greenspan’s speech (blandly titled “Reflections on Central Banking”) reads like the kind of paper you likely nodded over in Econ 101. But it contained an alert that should be as valuable to you and me as it is to your basic Fed governor.
Noting that personal wealth (fueled by real-estate values) has grown much faster than income, Greenspan said, “Such an increase in market value is too often viewed by market participants as structural and permanent.” That’s not necessarily so, he indicated, noting that “history has not dealt kindly with the aftermath” of an investment bubble, when public confidence wanes, values drop and debts have to be paid.
That’s the bad news. The good news, according to Greenspan, is that the economy has become more flexible and resilient, evidenced by the fact that the market drop of 1987, the bursting of the tech bubble in 2000 and the shock of Sept. 11 didn’t hurt the economy as much as similar events in the past. He says that the growing national debt looms as a threat and that the future is hard to predict.
“Every model, no matter how detailed or how well conceived … is a vastly simplified representation of the world,” he said, one central banker to another. He left lots to think about for the new chairman of the Fed, whoever that will be.
And his warning is worth pondering for the rest of us, too, whether you’re paying off a variable-rate mortgage, just bought a big SUV at “employee” prices, or are piling up credit-card debt to pay off the last vacation. If your income exceeds your appetite for goods or services or investments, Greenspan thinks you’re running a risk.
