The world's most powerful economist has this cautionary message for those figuring their home values will keep right on rising: What goes...

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JACKSON, Wyo. — The world’s most powerful economist has this cautionary message for those figuring their home values will keep right on rising: What goes up often comes down. Hard.

Federal Reserve Chairman Alan Greenspan, who has spent a half-century observing financial conditions, says “history has not dealt kindly” with those who figure the good times won’t end.

And in a message aimed more at policy-makers, he said bloated trade and budget deficits threaten the long-term health of the U.S. economy.

His warnings, made at a high-profile economic-policy conference, came as the Fed chief and prominent economists pondered his 18 years at the central bank and the legacy he will leave. He is expected to step down in five months.

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Rising house and stock prices have made many people feel more wealthy and have helped to support consumer spending, a key ingredient of the economy’s good health.

Greenspan, however, said people shouldn’t count on that paper wealth, which can evaporate if economic conditions deteriorate rapidly.

“What they perceive as newly abundant liquidity can readily disappear,” he said. “Any onset of increased investor caution” could cause home and stock prices to drop, he noted.

A long spell of low interest rates and low risks for investors has especially encouraged investment in homes. Greenspan worried about what would happen if that climate were to change.

“History has not dealt kindly with the aftermath of protracted periods of low-risk premiums,” he said.

“Greenspan is giving individuals ample warning that they need to take that into account,” Allen Sinai, chief global economist at Decision Economics, said in an interview. “He’s throwing out a yellow flag of caution.”

Sinai and others think Greenspan was strengthening his warning about the booming housing market. But they didn’t think he was signaling a new concern about the development of a national housing-price bubble. Instead, they said, he seemed to be stressing his oft-stated worries about bubbles in local housing markets.

“He’s staying with the position he had before. There are local bubbles but no national bubble,” Allan Meltzer, a Carnegie-Mellon University economics professor, said in an interview.

Stock prices and house prices are factors that Fed policy-makers are increasingly needing to consider when setting interest-rate policy, Greenspan said. “Our forecasts and, hence, policy are becoming increasingly driven by asset price changes,” he said.

During the high-flying stock-market days of the 1990s, the Fed chief in December 1996 famously questioned whether Wall Street investors were engaging in “irrational exuberance.” Despite the warning, stocks continued to soar. In 2000, the stock-market bubble began to rupture and wiped out trillions of dollars in paper wealth.

Maintaining economic flexibility is especially important, Greenspan said, to deal with what he called some of America’s economic imbalances — the swollen trade deficit, which surged to a record $668 billion last year, and the housing boom.

Greenspan’s remarks were to a conference, sponsored by the Federal Reserve Bank of Kansas City, called “The Greenspan Era: Lessons for the Future.”

“The Greenspan era gets extraordinarily high marks,” said John Taylor, a Stanford University economics professor. Those thoughts were echoed by many others attending the conference.

Greenspan’s appearance at the annual two-day conference, which is attended by Fed policy-makers, economists, academics and central bank officials from around the world, is expected to be his last as Fed chairman.