LONDON (AFX) - US Federal Reserve board chairman Alan Greenspan said risks to the global economy arise more from the uncertainties in the lead up to a war rather than the event itself. Speaking to economists here, Greenspan said it is "uncertainty not war per se, that causes the problem." The lead up to a war involves a very large risk premium. During the gulf war, oil prices surged after Kuwait was invaded but prices declined when the Gulf war began in earnest, he said.
The spike in oil prices had more to do with uncertainties. In the longer term, oil prices have tended to settle in the low 20s per barrel range, he said. He acknowledged that previous recessions in the US have been preceded by oil price shocks. However, because of the changes in the structure of the relationship between oil prices and the US economy, the chances of an oil price led recession in the US is now much lower than before, Greenspan said. "Obviously we cannot really know. We don't know how the uncertainties will work their way through," he added. Greenspan also said adjustments in accounting systems in the wake of the accounting debacles in the US have led to changing values on balance sheets. The changes have engendered "a system of conservative projections" which can occur "without a single thing happening in the real world," he said. Turning to the derivatives market, Greenspan said major expansion in this area has helped markets diffuse risks, aiding both the US and global economies "fend off extraordinary shocks."
The resilience and flexibility of derivatives markets are important for the overall economy, he said, adding that "there is positive good not to regulate these markets." It is important that regulators "do not somehow destroy the wealth creating aspects of markets," Greenspan said. //www.afxpress.com