Greenspan's speech reflects caution

n the first of two speeches at a Fed symposium about the "Greenspan legacy," Mr. Greenspan warned that investors as well as ordinary consumers were being too complacent in assuming that high interest rates, high inflation and sluggish growth in productivity are all things of the past.

Mr. Greenspan took particular aim at the willingness of investors to pay ever-higher prices for stocks and bonds and the torrid run-up in housing prices, as well as a greater willingness of people to spend money on the basis of increases in their apparent wealth rather than gains in their actual incomes.

Both trends reflect a willingness to accept unusually low "risk premiums," to pay top dollar for bonds or real estate and to accept a relatively low rate of return because people feel more secure and more tranquil about the long-run future of the economy.

Mr. Greenspan noted that big increases in wealth over the past decade stemmed in large part from the run-up in prices for assets ranging from bonds to houses, but he said such increases could evaporate if investors suddenly became more worried about risk.

"Such an increase in market value is too often viewed by market participants as structural and permanent," Mr. Greenspan said. But he warned that what people perceive as an abundance of new wealth "can readily disappear."

"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices," Mr. Greenspan said. "This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

Though the Fed chairman kept his remarks general, they harkened back to the mounting concern among policymakers and many outside economists about the possibility of a dangerous bubble in housing that could abruptly deflate and might send the economy into a tailspin.