Greenspan told a banking conference that the federal budget deficit was a bigger worry to him than America's soaring trade deficit or the high level of household debt because those two problems can be corrected by market forces.
"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances," he said in remarks to a banking conference.
The Fed chief's warning came amid more good economic news. The government reported that productivity surged 3.5 percent in the first quarter, and that claims for unemployment benefits plunged last week.
Greenspan noted that the federal deficit, estimated to climb above $500 billion this year, would amount to 4.25 percent of the total economy after being in surplus just a few years ago.
He said one of the biggest concerns was that the deficits now were occurring right before the first wave of baby boomers will begin retiring.
"We have legislated commitments to our senior citizens that, given the inevitable retirement of our huge baby-boom generation, will create significant fiscal challenges in the years ahead," Greenspan said in his remarks, which were delivered by satellite to the conference in Chicago.
Greenspan cautioned that the United States should not be lulled into a false sense of security about the federal deficit just because at the moment interest rates on long-term Treasury securities still remained at low levels.
He said that the dollar's foreign exchange value has remained close to the average level of the past two decades in spite of the soaring trade deficits and there have been no major economic disruptions triggered by the record high levels of household debt.
"Has something fundamental happened to the U.S. economy and, by extension, U.S. banking, that enables us to disregard all the time-tested criteria of imbalance and economic danger?" Greenspan asked,
Answering his own question, the Fed chairman said, "Regrettably, the answer is no. The free lunch has still to be invented."
Greenspan said in regards to the U.S. trade deficit and the high level of household debt, he believed that market forces would provide the impetus to move those levels to more sustainable levels.
But he said his concern was that there were no market forces that would push the country to deal with the federal budget deficit.
Greenspan did not offer a solution to the budget deficit in his speech Thursday although in the past he has called on Congress to move quickly to address the looming funding difficulties in Social Security by trimming the benefits of future retirees.
Two suggested proposals he has put forward include raising the retirement age for receiving full Social Security benefits and adjusting downward the annual cost of living adjustments that Social Security recipients receive.
Federal Reserve policy-makers met on Tuesday and left a key interest rate at a 46-year low but signaled that they planned to start raising rates at a moderate pace in coming months. Greenspan did not address interest rates in his prepared remarks.