WASHINGTON, 31 August — Alan Greenspan, who six years ago branded share price values as "irrational exuberance", yesterday insisted the US Federal Reserve Board could have done nothing to avert a stock market bubble.

The chairman of the Fed said hikes in interest rates directed at deflating a share price bubble could simply trigger a wider economic slump. Greenspan has been accused of creating the conditions for the current US recession by failing to tackle the boom in asset prices.

But Greenspan told a high-profile economic conference meeting in Jackson Hole, Wyoming yesterday: "No low-risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble." The economy boomed during the decade and the business cycle of expansion and contraction became less volatile, leading investors to pour ever-increasing amounts of money into stocks in the belief that earnings would keep rising, he said.

But he told the symposium, which was sponsored by the Kansas City Federal Reserve, that the Fed could not be sure a bubble was developing because IT investment had raised the level of US productivity. "It was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity, the very outcome we would be seeking to avoid," he said.

Greenspan used a speech in December 1996 to ask whether the Fed would know if "irrational exuberance" had taken hold of investors.

In July 1999 he warned Congress that productivity acceleration could not alone ensure stock prices were not too high.

Yesterday, Greenspan said the Fed would have to change the mindset of investors to relieve an asset price bubble.

But he added: "Prolonged periods of expansion promote a greater rational willingness to take risks, a pattern very difficult to avert by a modest tightening of monetary policy." He did not comment on current economic conditions other than to say that the recent recession was "relatively mild".

The Fed’s open market committee meets on Sept. 24. At its meeting a fortnight ago, it said the risks were weighted toward contraction, which was seen as hint it could cut rates soon. (The Independent)