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Greenspan forecasts no “bubble” threat because of inflation

Saturday, May 31st 2008 - 21:00 UTC
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United States former Federal Reserve Chairman Alan Greenspan said on Friday in Canada that he does not expect another “bubble” in world markets for a long time but warned about the threat of inflation.

Speaking at an event in Montreal he said bubbles do not form when inflation pressures begin to emerge, adding that central banks do not control the long-term interest rates that can be related to bubbles. "The so-called asset bubbles --such as the U.S. housing boom caused by lax lending rules-- only occur when a series of conditions are in place, including low inflation and excessive confidence in the economy and certain investments. "But once you get inflation pressure starting to emerge, you don't get bubbles" underlined. He said that experience at the Fed has showed that central bank rate changes have little effect on the longer term interest rates that are often associated with bubbles in financial markets. He referred to US rate hikes in the early 1990s failing to prevent excessive confidence in stock markets. Greenspan also said that stagflation, a combination of weak growth and high inflation as happened in the seventies "was a real concern". The former Fed head added he expected oil prices to continue an upward trend over the long term although he predicted significant periods of price declines. As to current prices "they are due in part to speculation he said, but also in part due to strong demand". However he discarded that commodity prices are not a new bubble in the making, he said. Specifically about the United States, and possibly referring to the electoral campaigning, what concerns him most, he said, is the failure of some to recognize that protectionist trade measures would reduce the economy's ability to adapt to shocks like the subprime mortgage debacle. "It's a very costly thing to move away from global markets" he emphasized. Greenspan was relatively optimistic that the turmoil in financial markets from the credit crunch, which erupted last summer from the US subprime mortgage crisis, was subsiding. However "the effect of crisis is now being felt not only in the developed world but in emerging markets, particularly in Asia". As to inflation, he described the critical issue as "political", because central bankers will no doubt act to keep inflation under control, but "whether politicians are wise enough to realize that low inflation is a major factor in economic growth" is something different, he said recalling his long experience as chairman of the world's most important central bank.

Categories: Economy, United States.

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