Former Federal Reserve chairman Alan Greenspan said during an interview with CNBC Squawk Box that he doesn't see any "irrational exuberance" in today's stock market. Giving his opinion on the current economy, Alan Greenspan said the markets are "significantly undervalued." The Dow Jones Industrial Average has touched a new record high, so Greenspan's comments came as a surprise. Additionally, it is rich to hear from a man who many argue helped cause the biggest bubble in history state that he does not exist today.
Greenspan advised investors not to worry about the so-called irrational exuberance pushing the current stock up. He said the increased payroll taxes didn't affect spending because of the continued rise in asset prices. Alan Greenspan coined the term "irrational exuberance" in 1996 when the stock was soaring high.
That was the same year Dow Jones had the last 10-session winning streak. Today, the Down has a possibility to make it 11-session winning streak, the longest since November 1996. Another fact worth noticing is that this year Down Jones Industrial Average has closed higher on every Friday so far. The Standard & Poor's 500 Index is just two points away from its all-time high closing.
The ex-chairman of the Fed said the current bullish run is helped by the alleviating fears about European sovereign debt crisis. When asked if the Federal Reserve's asset purchase program is responsible for the rally, he immediately dismissed the idea. Greenspan said that the increasing home and stock prices have protected the economy from the damage the increased payroll taxes would have caused. Greenspan sees a good upside potential for housing prices.
Talking about big banks, he said that the Dodd-Frank Wall Street Reform Law has a faulty structure and the law is unlikely to be fully implemented. To help protect against failure, the financial institutions should maintain a higher level of capital on an ongoing basis. But if a failure looks imminent, the banks should be allowed to through a Chapter 11-type process, and the market should adjust itself accordingly.
He said the banks shouldn't be forced to split the commercial and investment banking because the system today has become much more complicated. So breaking up the banks doesn't make sense. But if there isn't any other way to resolve the "too big to fail" problem, Greenspan favors a break up.