Greenspan Warns On Deficits, Trade

Creeping trade protectionism and bloated budget deficits pose a risk to the United States' long-term economic vitality, Federal Reserve Chairman Alan Greenspan warned Friday.

"Developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset: the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks," the Fed chief said in a speech to an economic conference here, sponsored by the Federal Reserve Bank of Kansas City.

Maintaining economic flexibility is especially important, Greenspan said, to deal with what he called some of America's current economic imbalances: the swollen current account trade deficit, which surged to a record $668 billion last year, and the housing boom.

Greenspan also worried in his speech about what will occur with the ending of the recent sustained period of low interest rates and low risks for investors. "History has not dealt kindly with the aftermath of protracted periods of low risk premiums," he said in his prepared remarks.

Greenspan's speech was to a conference titled "The Greenspan Era: Lessons for the Future."

The Fed chief, who has steered the world's largest economy through both smooth and choppy economic waters for 18 years, plans to step down in just five months.

Greenspan's appearance at the annual Fed conference, which is attended by other Fed policy-makers, economists, academics and central bank officials from around the world, is expected to be his last as Fed chairman.

Looking back over his tenure, Greenspan said that a key hallmark of his approach to monetary policy-making has been preparing for a wide spectrum of economic outcomes: from the most likely to the most unlikely.

The Fed's worry in the summer of 2003 about the remote threat of deflation — a widespread decline in prices that can severely harm the economy — prompted the Fed to keep cutting short-term interest rates, Greenspan noted.

"Given the potentially severe consequences of deflation, the expected benefits of the unusual policy action were judged to outweigh its expected costs," he said.