Alan Greenspan Shares His Thoughts On The Complexity Of Tapering

Alan Greenspan, former Federal Reserve Board Chairman and President of Greenspan Associates has concerns about the readiness of the market for Fed tapering. He appeared on CNBC's Squawk Box on Friday morning to discuss his thoughts. Greenspan noted that he thinks it's going to be more difficult after the Fed tapers than most people in the market think. He said that there's "a very large element of uncertainty" in regards to "what the markets are doing." "The sooner we come to grips with this excessive level of assets and the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better," said Greenspan. Greenspan said that the issue is "not only the question of when we taper down, but when do we turn?" "The markets may not give us all the leeway we would like to do that," Greenspan continued. He thinks that when the "Fed induces long-term rates to fall, it creates a buffer for stock prices to rise, but there are so many other forces at play here." An example, he said, is the tricky earnings outlook. Productivity is slowing down, and even though we get very low wage rates, according to Greenspan they can only last for so long, saying that "we are playing here with a bunch of very sensitive issues." He said if earnings stop rising, then we really have a problem. Though Greenspan doubts that scenario. "Markets are always artificial in one sense. They have a wonderful capability of getting rid of the artificiality," said Greenspan. "My concern is that bond prices have got to fall, and long-term rates have got to rise. And the problem which is going to confront us is we haven't a clue as to how rapidly that's going to happen, and I think that we must be prepared for a much more rapid rise than is contemplated in the general economic outlook of all the people with whom I talk." According to Greenspan, if the Fed moves too rapidly, it could shock the market. He thinks gradual movement is "adequate," but said that it needs to start soon. "Our ability to forecast is far less than we understand," said Greenspan. He said that we often underestimate how markets behave. "Remember, a necessary condition for a major economic and financial move is that nobody expects it to happen," said Greenspan.