Near-record US stock market not in a bubble, says Greenspan

Former Fed chief says US economy will grow more slowly next year than expected

Former US Federal Reserve chairman Alan Greenspan said the US economy probably will grow more slowly next year than some forecasters predict and indicated that a near-record US stock market was not in a bubble.

"This does not have the characteristics, as far as I'm concerned, of a stock market bubble," Mr Greenspan said in an interview with Bloomberg Television, which is due to air this weekend.

“It could come out that way but I don’t see it at this stage.”

Mr Greenspan said that even with the rise in equities, the US economy is restrained by a “degree of uncertainty” that is reducing investment.

Economists who forecast 2.5 per cent to 3 per cent growth next year may be too optimistic, he said. “It’s a little on the upside, frankly,” Mr Greenspan said. “There’s no doubt that there’s been some acceleration going on, but there’s an overall suppression that is going on in the economy” largely because of lingering uncertainty, he said.

Mr Greenspan said his 2014 growth forecast is “closer to 2 per cent.”

He said the economy is being held back in part by the banking system, as some of the largest banks are not operating efficiently.

“We’re supporting banking institutions who are not only very large, but not very efficient and they are using the scarce savings of the society, which is critical for economic growth,” he said.

He declined to identify which banks had become inefficient. The Standard and Poor’s 500 Index has rallied about 27 per cent this year, heading for the biggest annual gain since 1998, as the Fed has pressed on with its stimulus campaign.

The S&P 500 climbed 0.2 per cent to 1,806.85 in New York yesterday, while the Dow Jones Industrial Average rose 0.2 per cent to 16,097.46. Both indexes reached records this week. “The stock price generally goes up about 7 per cent a year for the long term,” Mr Greenspan said.

“It didn’t go anywhere since October 2007 and the result of that is we’re just now breaching that. We have had no growth in stock prices for years.”

The S&P 500 reached 1,565.15 on October 9th, 2007, and then dropped 57 percent as the economy went through the longest and deepest recession since the Great Depression. The index didn’t surpass its October 2007 peak until March of this year.

Mr Greenspan also offered praise for Janet Yellen, the nominee to be the next Fed chairman. She was approved by the Senate banking committee with a vote of 14-8 on November 21st and now heads to the full Senate.

Ms Yellen (67) was a governor at the Fed from 1994 to 1997 under MrGreenspan and became president of the San Francisco Fed during the final years of Mr Greenspan’s tenure, which ended in January 2006.

Bloomberg