Watch CBSN Live

Fed Focus On Investor Risk

Tokyo share prices fell, London shares are down, and the dollar tumbled against the Japanese yen Friday following a fresh warning from U.S. Federal Reserve Chairman Alan Greenspan against excessive optimism by stock traders.

At the same time, the Labor Department announced that SeptemberÂ's prices at the wholesale level reflected the largest increase in nine years. Such an advance in wholesale prices, if matched at the consumer level, could stoke concerns at the Federal Reserve about a potential breakout of inflation.

The chairman of the U.S. central bank, however, made no comments Thursday on monetary policy or on the likelihood of the Fed raising interest rates in the near future.

Greenspan's cautionary words sent Asian stock markets into a spin and hit the futures markets in the United States hard.

In a speech at a special conference on risk management sponsored by the Comptroller of the Currency, Greenspan said bankers, portfolio managers and individual investors need to assess the risks to their investments from the possibility of an asset bubble.

Not only do they need to judge the inherent riskiness of their own positions, but they need to assess what Greenspan termed "macro" risks.

"The question of the permanence of the decline in equity premiums is of critical importance to risk managers," the Federal Reserve chairman said. "They cannot be agnostic on this question because any abrupt rise in equity premiums must inevitably produce declines in the values of most private financial obligations."

Greenspan said it is possible, as many have suggested, that the high price/earnings ratios of many stocks could be a lasting and fundamental change that is based on investors "learning" that the traditional wide spread between equities and risk-free investments is unjustified by experience. Some have suggested that equities are no riskier (in the long run) than U.S. Treasuries.

On the other hand, they could be based on a long economic expansion that has dulled investors to reality.

The chairman repeated his earlier comments on the stock market by saying that the Fed cannot hope to anticipate a collapse in stock prices because it can never know if stocks are fairly valued or not.

"To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors," he said.

However, Greenspan warned portfolio managers and investors to take the possibility of a financial panic into account when they try to diversify a portfolio to minimize risk and maximize returns. In a panic, he said even liquid and risk-free assets are affected.

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.