Greenspan warns about potential housing bubble

If house prices were to fall suddenly or if interest rates were to rise rapidly, some local housing markets, homeowners and lenders could get clobbered.

The world's most powerful economist has this cautionary message for those figuring their home values will keep right on rising: What goes up often comes down. Hard. Federal Reserve Chairman Alan Greenspan, who has spent a half century observing financial conditions, says "history has not dealt kindly" with those who figure the good times won't end. And in a message aimed more at policy-makers, he said bloated trade and budget deficits threaten the long-term health of the U.S. economy. His warnings, made at a high-profile economic policy conference, came as the Fed chief and prominent economists pondered his 18 years at the central bank and the legacy he will leave. He is expected to step down in five months. Rising house and stock prices have made many people feel more wealthy and have helped to support consumer spending, a key ingredient of the economy's good health. Greenspan, however, said people shouldn't count on that paper wealth, which can evaporate if economic conditions deteriorate rapidly. "What they perceive as newly abundant liquidity can readily disappear," he said. "Any onset of increased investor caution" could cause home and stock prices to drop, he noted. A long spell of low interest rates and low risks for investors has especially encouraged investment in homes. Greenspan worried about what would happen if that climate were to change. "History has not dealt kindly with the aftermath of protracted periods of low-risk premiums," he said.