Tags: Greenspan | stocks | bubble | Dodd-Frank

Greenspan: Stocks Aren't in Bubble Territory

By Dan Weil   |   Friday, 07 Mar 2014 11:09 AM

While some financial commentators argue that the stock market has turned into a bubble, former Federal Reserve Chairman Alan Greenspan disagrees.

"That's not to say we may not be near highs, but you don't get the buoyancy, the type of movements — what I would call the equity premium that characterizes a bubble or euphoria," he tells CNBC.

"Two or three years ago, we were at the highest level of equity premium, a rate of return on equity that the markets require. We had had the highest equity premium in 50 years. It's come down a bit."

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000

Greenspan says the Fed can't prevent bubbles. "You can try to defuse it. You'll fail, as we did in 1994," he explains. "Unless you break the back of the actual euphoria that generates the bubbles, you're bound to fail. And the result of that is something that is outside the hands of the Fed."

Asked if there's a bubble in Silicon Valley acquisitions, Greenspan answers, "Bubbles are not the problem. Bubbles, by definition, will deflate. It's the institution which holds toxic assets which is a critical issue."

For example, when the dot-com stock bubble burst in 2000, huge losses resulted. "But it was essentially in those types of institutions which were not leveraged," he notes.

"At the time, households, they weren't. Other pension funds, mutual funds, they took a huge hit. But to get a crisis, you need serial default."

And, of course, no serial default occurred then. "If you look at the effect on the GDP, it was virtually negligible," Greenspan argues.

He is very concerned about banks being adequately capitalized. "There's nothing superior to that." But he's not too impressed with the Dodd-Frank financial reform law.

"Coming from what's in Dodd-Frank, the diagnosis is basically wrong," he maintains.

"We're getting into a situation where the problem is wholly in the capital area. We went into the Lehman Brothers [crisis] with Lehman holding 3 percent tangible capital. You can't function that way."

Dodd-Frank is holding back the economy. "The difficulty is when I was at the Fed we had a few rulings a year," Greenspan says.

"Those rulings were extended because you had to go through all sorts of loops and circles of discussing with your colleagues and regulatory areas. And we managed to do that."

But Dodd-Frank includes a huge number of requirements, he adds. "I don't think there's enough time to do it," he said. "And I don't think it's going to work. In fact, I wrote an op-ed piece immediately after Dodd-Frank carried on. I said this isn't going to work, and it hasn't."

Many other experts don't see a bubble in the stock market either.

Jeffrey Kleintop, chief market strategist at LPL Financial, tells CNNMoney that stocks can achieve "mid- to high-single-digit gains" before dividends over the next 10 years, though not without increased volatility.

So the stock rally isn't winding down, he says. "In fact, the bull market may be getting a second wind."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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