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To: long-gone who wrote (23981)	12/8/1998 7:50:00 AM
From: lorne	Respond to of 116779

Ex-Fed Gov. Says Greenspan Wary Of Financial ''Bubble'' 12:15 a.m. Dec 08, 1998 Eastern By Isabelle Clary NEW YORK (Reuters) - Federal Reserve Chairman Alan Greenspan is troubled by his current dilemma of trying to keep the U.S. economy growing without contributing to a ''bubble'' in which U.S. stocks and other financial assets may be dangerously inflated, former Fed Gov. Lawrence Lindsey said Monday. ''I don't think Alan is happy,'' Lindsey told an audience of economists and bankers at the Harvard Club where he presented his latest book, ''Economic Puppetmasters, Lessons from the Halls of Power.'' Lindsey said Greenspan sees some eerie similarities between the current economic climate and the situation that existed in the years before the stock market crash of 1929 that triggered the Great Depression. But Greenspan remains optimistic a Depression is not in the cards today because policy makers are better informed than Fed officials were in the 1930s when they underestimated the magnitude of the problems America was facing. ''If actions in 1930 and 1931 were taken differently, we might have had a fairly significant recession, but we would not have had the deep fall that we know as the Great Depression,'' Greenspan told Lindsey. Lindsey, a former Fed governor who served on the Fed Board between November 1991 and February 1997, said the Fed's more relaxed monetary policy during recent years has ''created a financial asset bubble.'' Such bubbles can form when interest rates are low and financial institutions eager to lend. Investors can then end up with plenty of funds to buy financial assets, such as stocks. This can drive prices of the assets higher than would normally be justified by the likely returns on those investments. This situation, Lindsey said, could hurt the U.S. economy if the bubble bursts or consumer price inflation begins to accelerate as a result. ''Greenspan sits on the horn of a dilemma. The dilemma is not to let the bubble get out of hands and, at the same time, let the world go ahead,'' said Lindsey while explaining the difficulty of conducting U.S. monetary policy while other nations are suffering from economic crises. ''If Greenspan does both, he deserves the beatification he is getting,'' added Lindsey who served as Fed Board Governor under Greenspan from November 1991 to February 1997. Lindsey's book details the complexity of a central banker's task of creating the best possible conditions for an economy to expand as fast as it can without risking a speedup in consumer price inflation. ''What scares me the most is that the only thing we're counting on for the world to get out of this (crisis) is for the American consumer to keep on buying and, for this, to have the value of their (financial) portfolios get bigger and the bubble go on,'' Lindsey cautioned. The Fed cut interest rates three times between late September and mid-November to protect U.S. financial markets from the contagion effect of overseas turmoil which could, in turn, dampen the expansion. Greenspan shared the same concern about a possible bubble in U.S. stock prices, and told Lindsey in a private meeting in mid-April he saw ''all sorts of parallels to the late 1920s,'' but did not think ''that even if you get to a 1929'' U.S. stock market crash, ''you'll end up with a 1932'' Great Depression. ''There is a fundamental problem with market intervention to prick a bubble,'' Greenspan told Lindsey. ''It presumes that you know more than the market. There is also a problem of timing.'' Lindsey, who now is an economist at a private think-tank, the American Enterprise Institute, and at his own advisory firm, Economic Strategies, agreed we may ''not have the 1930s again. But to say we are not going to have problems in our financial markets, that's irrational exuberance.'' Greenspan used the term ''irrational exuberance'' in his notorious stock market remark of December 1996 when he warned that equity prices may be inflated. At the time, the Dow Jones industrial average stood at 6500, much lower than its current level. The index recently climbed to a high of 9380. Japan remains a sore spot on the world economic horizon, according to Lindsey who described the country as ''a very depressed place ... that really needs some Prozac.'' He did not expect the Japanese economy to really turn around for another 18 months.