Another View
NEW YORK (CNNfn) - Long-term interest rates in the United States may climb another 60 basis points to 6 percent this year, and rates are headed higher in Japan as well, former Federal Reserve Governor Lawrence Lindsey said Tuesday.
But Fed Chairman Alan Greenspan will "let the bond market do the heavy lifting," Lindsey told anchor Jan Hopkins on the "Moneyline News Hour with Lou Dobbs."
The Fed is reluctant to take direct action to raise rates, partly for concern of the impact on stocks, Lindsey said.
And while Greenspan again expressed concern that the U.S. stock market is overvalued and due for a fall, Lindsey said: "He feels that it is going to fall at some point, and frankly, I think he wants to make sure that everyone understands, it was not him and it was not the Fed. The market was pushed too high by investors, and they are going to lose some money."
Here are highlights of that interview:
JAN HOPKINS, ANCHOR: So what did Alan Greenspan really say about interest rates?
LAWRENCE LINDSEY, FORMER GOVERNOR, FEDERAL RESERVE BOARD: I think he signaled that the Fed will be on hold, but that he expects international events to raise interest rates for him. Let the bond market do the heavy lifting.
HOPKINS: So the bond market has already done that. We're up a quarter of a percentage point in the last few weeks. You think that that will continue?
LINDSEY: I think the bond market is headed much higher in yield terms. We have a major debt issuance coming from Japan this year, one actually of unprecedented size. We've got to fund 400 billion in Japanese budget deficit, a $300 billion U.S. current account, and there just isn't enough savings in the world to do both.
HOPKINS: So interest rates are going higher, basically, because there are going to be more bonds around the world available for investors to buy?
LINDSEY: Absolutely -- and it's not going to mean more economic activity. We're issuing bonds out of weakness, not out of strength. We're issuing bonds in order to restructure and recapitalize the world's financial system.
HOPKINS: But the Federal Reserve's not going to do anything in this environment, in your view?
LINDSEY: I don't think so. I don't think the Fed wants to raise rates. I think that's very dangerous, given the state of financial markets. But, certainly, with the economy this strong, the Fed can't cut rates either. So I think the Fed is on hold and we'll let the bond market do the job of limiting credit.
HOPKINS: And how high will rates get?
LINDSEY: I wouldn't be surprised, later this year, to see a 6 percent long bond.
HOPKINS: We're now at 5.42.
LINDSEY: Yes -- yes, Japanese yields are up 160 basis points. I think they're headed up even more. Ours are going to have to go the same direction.
HOPKINS: What did Mr. Greenspan really say about the stock market?
LINDSEY: Greenspan has been warning, consistently, that the stock market is too high. It's too high by any set of valuation measures. He feels that it is going to fall at some point, and frankly, I think he wants to make sure that everyone understands, it was not him and it was not the Fed. The market was pushed too high by investors, and they are going to lose some money.
HOPKINS: In his view, and the Federal Reserve's view, how overvalued is the stock market?
LINDSEY: Well, I think there are lots of models and picking a number, I think, would be difficult. But before interest rates started climbing the number was 20 percent. Now that we have higher interest rates, I think it's overvalued by more than that.
HOPKINS: And if the market fell by more than 10 percent, perhaps, 20 percent, would it have an effect on the economy?
LINDSEY: Oh, I think some. But I wouldn't want to exaggerate it. If you wipe out, let's take 20 percent, say $2 trillion of wealth, that will slow consumption over the long term by about $60 billion. That's about 8/10 of a percent of GDP. With the economy still growing this strong, it would be a loss, but by no means a recession.
HOPKINS: Did Mr. Greenspan actually say that the Fed made a mistake by lowering rates the last time last year?
LINDSEY: I don't think the Fed ever makes a mistake. It acts on the information it has at the time. It may be in retrospect that you could do a little bit differently. I don't think -- I didn't hear Greenspan say he made a mistake. But I think he did the best job he could under tough circumstances.
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