Greenspan Urges Caution

(AP)  Federal Reserve Chairman Alan Greenspan issued a fresh warning on Tuesday that investors shouldn't be lulled into a false sense of security by the economy's long stretch of low interest rates.

"History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets," Greenspan said in a speech delivered via satellite to a meeting of the National Association for Business Economics in Chicago.

Greenspan, in Tuesday's speech, didn't specify what risky assets he was referring to. But the Fed chief has been sounding an alarm for months, including an emphatic warning on Monday, about the perils to home owners and lenders using risky and exotic types of mortgages.

In his remarks Tuesday, Greenspan repeated worries he has expressed in the past: that a rise in interest rates might spell trouble for some investors who are counting on rates to stay low for an extended period of time.

"Such developments apparently reflect not only market dynamics, but also the all-too-evident alternating and infectious bouts of human euphoria and distress and the instability they engender," he said.

The country enjoyed some of the lowest mortgage rates in more than four decades, when the Federal Reserve ratcheted down a key interest it controlled to the lowest level in 46-years. However, since June 2004, the Fed has been raising rates gradually to keep inflation in check.

This Fed campaign is beginning to have an impact on long-term interest rates set by financial markets. While long-term rates, such as those on mortgages, are still considered low, analysts do believe that they will move higher in coming months.

Low mortgage rates powered home sales to record highs four years in a row and are on track to set a new record this year. The hot housing market has sent home prices skyrocketing.

Greenspan said it is "difficult to suppress growing market exuberance when the economic environment is perceived as more stable."

• 1
• 2
• Next Page »