Greenspan Cites U.S.’ Economic Flexibility

The country’s ability to weather a surge in energy prices is the latest example of how economic flexibility helps prevent serious recessions, Federal Reserve Chairman Alan Greenspan said Wednesday.

Separately, Federal Reserve Gov. Susan Bies on Wednesday warned about risky real-estate lending practices, saying banks could be hurt by higher interest rates or a decline in home prices.

Greenspan said an environment of maximum competition has been the driving force in spurring the type of flexibility that has allowed the country to withstand a number of shocks over the last two decades with only two mild recessions.

“The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have produced marked economic contractions, offers the clearest evidence of the benefits of increased market flexibility,” Greenspan said to the National Italian American Foundation.

Wall Street investors have given Greenspan credit for the economy’s good performance, for his skillful handling of a number of economic shocks.

Greenspan ascribed the economy’s ability to avoid steep recessions to overall market flexibility rather than good policies at the Federal Reserve.

“Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years,” Greenspan said.

“Although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades,” he said.

Greenspan said it was important to understand that the long stretches of economic stability can create other problems.

While Greenspan did not elaborate, in recent months he has been warning about risks borrowers could face after an extended period of extremely low interest rates. He has warned that some homeowners who used exotic interest-only loans to buy their homes could be in trouble as interest rates start rising.

Bies echoed that theme. “Banking supervisors have become concerned recently about apparent increased risk-taking in both commercial and real estate lending,” she told the National Bankers Assn.