Host: The question of the morning: Do you want to break out the phrase again, irrational exuberance?
Greenspan: [Chuckling] No, I don’t think it’s quite appropriate in this type of environment. In fact the basic way of looking at this degree of exuberance or non-exuberance is to take a look at what we call the equity premium, as you know it’s the extent of the measure that stocks are overvalued or undervalued, and right now by historical calculations we are significantly undervalued. The reason why the stock market has not been significantly higher is there are other factors compressing it lower. But irrational exuberance is the last term I would use to characterize what’s going on at the moment.
Host: Is this a Fed-fuel rally?
Greenspan: I think you can fully explain the rally in terms basically of the issue of the removal of what economists call tail risk, that is, what has been sitting out there virtually most of this year, and part of last as well, has been the European problems which have every characteristic of caving in the economies of the world as a whole, and that has been temporarily removed. The result is removing that key factor has allowed the markets to move up. It’s not because earnings are moving all that well. As you know, earnings or expectations at least have been flat or down awhile. What it’s basically doing is the valuations structure [sic], and still has quite a way to go as far as I can see.
Investor Bill Miller: Mr. Chairman, how well grounded is the housing rally? Housing starts are approaching a million–what’s equilibrium in your view, and how far along are we in the housing cycle?
Greenspan: Well, we’re I would say somewhere in the middle but we have a good way to go. The data I look at are essentially, well I should say, price is a critical issue. Home prices are moving up and in fact they are moving up a little bit faster than I think the data show largely because the data are delayed. But the critical elements that determine whether market prices of homes are rising is essentially the issue of what is happening to home ownership. The underlying demand for home ownership as you know has essentially gone down very sharply after the crisis, and … the latest data we currently have is that home ownerships rates are still at the bottom of their recent decline. I am almost certain, however, they have already turned up and I am reasonably certain that the rise of home prices has generated a very significant and important rise in home equity, meaning the equity of homes which has basically moved a lot of underwater mortgages into positive ground, and in fact a goodly part of the seeming strength that we’re seeing in the economy very recently is coming from both the stock market and home prices. That is, asset prices generally I think are underestimated with respect to housing, in fact the economy as a whole, and both home prices and stock prices have been very powerful forces here.
View more at the link above. At the end of the interview, Greenspan expresses hope that Bernanke will remain Fed chairman beyond January 2014.