Former Federal Reserve Chairman Alan Greenspan said he doesn’t think the Fed can unwind years of extraordinary stimulus without causing turmoil in financial markets.

“I don’t think it’s possible,” Greenspan said during an event today at the Council on Foreign Relations in New York, responding to a question about the likely market impact of the Fed’s exit.

While the Fed’s bond-buying program has been a “terrific success” in boosting asset prices, it hasn’t galvanized effective demand in the real economy, Greenspan said.

The Fed’s bond purchases have had a “major effect” on price-to-earnings ratios, capitalization rates in real estate, and all income-earning assets broadly by “getting the real rate of return on long-term assets down,” Greenspan said.

David Fuller's view

An occasional degree of turmoil in financial markets is an occupational hazard, but also an opportunity.  However, I don’t think Alan Greenspan will be on Janet Yellen’s Christmas card list this year.      

It is never easy to “galvanise effective demand in the real economy” after a severe credit crisis recession, as financial history has shown us.

However, many of the corporate Autonomies are doing better because they are multinational firms, benefitting from improving technologies.  Technology firms which are leading in the accelerated rate of innovation are often among the market leaders.  These are secular rather than cyclical trends.