ALAN GREENSPAN, the revered former chairman of the US Federal Reserve, last night raised the spectre of sharp falls in prices for financial assets such as shares and bonds, which he argued were now too high.

In uncharacteristically stark terms that he rarely used in his time at the Fed, and which will send a shudder through investors around the globe, Mr Greenspan suggested that markets around the world were overvalued.

“Asset prices will fall eventually,” he predicted bluntly over a satellite link to a financial conference in Seoul, South Korea.

The former Fed chief blamed a global glut of spare capital for pushing up the value of shares and other assets.

He said that this had helped to drive down the equity premium — the extra return that investors demand for holding riskier assets such as equities — as well as real long-term interest rates. The result was that the market value of assets worldwide had been rising faster than the nominal growth in national incomes.

“That cannot go on indefinitely,” he argued.

Mr Greenspan said that the situation would end when the amount of excess capital dropped. “I don’t know when the liquidity is going to decline, but I am reasonably confident that what we have is an abnormal situation,” he said. His comments echoed his famous 1996 warning over “irrational exuberance” in markets. However, asked yesterday whether the same diagnosis applied to present conditions, he said: “I would hesitate to use it in today’s context. Irrational exuberance, I think, would be a stretch at this point.”

Despite this, his latest cautionary words will still send a chill through investors. Equity markets in Britain, the United States and Europe recently have scaled five-year highs and worldwide share values are within striking distance of record highs.

The steep gains have prompted warnings of corrections from some analysts.

There are also fears that the “liquidity glut” to which Mr Greenspan referred yesterday has created a bubble in bond prices by artificially depressing yields in the market.

In other comments yesterday, Mr Greenspan argued that some sections of the tough Sarbanes-Oxley corporate governance regime in America created too many burdens on companies, although he said that the law as a whole marked an advance.

“The Sarbanes-Oxley Act has created significant problems for foreign investors with its regulatory structure,” he said.

He added that he was concerned that this had led to a loss of flotation business by New York, to London’s gain.

“I am acutely aware and disturbed by the fact that initial public offerings have moved away from the US — and to a large extent have moved to London,” he said.

Discussing the dangers posed by the huge global econnomic imbalances made evident by the vast US current account deficit, Mr Greenspan also said that he believed that the imbalances could be corrected if Asian nations enjoying high growth, such as China, would allow their currencies to strengthen.

“I realise what that does to competitiveness, but that’s the way the markets work efficiently,” the former Fed chairman said, adding that allowing currencies to float created “all sorts of distortions”.

However, Mr Greenspan said he doubted whether the China or other Asian nations could agree on a single plan for currency adjustment.

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