July 25 (Bloomberg) -- Economic prosperity under Federal Reserve Chairman Alan Greenspan has changed the way Americans handle their finances.

Encouraged by rising home and stock prices, they have taken on more debt and saved less. Managing risks from that legacy may be one of the toughest tasks for whoever eventually replaces Greenspan when his term expires Jan. 31 after more than 18 years at the Fed.

``The American economy is in a very precarious position,'' Joseph Stiglitz, a professor at Columbia University in New York and winner of the 2001 Nobel Prize in economics, said in an interview. ``We have a very high legacy of debt. That is what his successor is going to have to deal with.''

As leader of the world's most influential central bank, Greenspan presided over the longest expansion in U.S. history, from 1991 to 2001. Consumers have come to expect long periods of prosperity and the soaring asset prices that accompany them. The result of this unbridled optimism ranges from house prices that have risen 50 percent since 2000 to the lowest savings rate in more than 70 years.

Fed officials including Greenspan already are stepping up warnings that households and the markets financing them may have been lulled into a false belief that asset gains and moderate business cycles are guaranteed.

``Long periods of relative stability often engender unrealistic expectations of its permanence,'' Greenspan said in his written semi-annual testimony before Congress last week. That can lead to ``financial excess and economic stress.''

Successes

The investor and consumer attitudes that Greenspan frets about are in some ways the result of his own success.

Fed policies wrenched down inflation, leading companies to compete on efficiency gains. Incomes rose, unemployment fell and the central bank's rate cuts kept two recessions to just eight months each. The government may report July 29 that the economy expanded at a 3.5 percent annual pace from April through June, based on the median forecast of 57 economists in a Bloomberg News survey; that would be the ninth quarter in a row with growth of 3 percent or more. Household wealth boomed as long expansions pushed stock indexes to records, and the low interest rates of the past three years accelerated purchases of durable goods.

``The precautionary motive to save has been reduced,'' says Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Consumer spending accounted for more than 70 percent of the economy every year starting in 2002, the most since the end of World War II. Household saving fell to just 1.3 percent of income in 2004, the lowest since 1934, and below the averages of 5.1 percent in the 1990s and 9.5 percent in the 1980s.

An Ever-Larger Burden

Debt is becoming an ever-larger burden. A Fed measure of estimated payments of mortgage and consumer debt stood at 13.4 percent of household disposable income in the first quarter, the highest since records began in 1980.

Behind it all are buoyant asset prices that raise perceptions of wealth. Household net worth, a measure that subtracts debt from assets including real estate and stock portfolios, averaged 5.57 times personal disposable income for the decade ended 2004 compared with 4.41 times for the 10 years ended 1994.

``People have gotten used to the Greenspan era,'' says Paul Kasriel, director of economic research at Northern Trust Securities in Chicago. ``They are going to miss him'' because his policies spurred gains from investment in stocks, bonds and other assets.

Marvels

For Greenspan, 79, and Fed governors such as Donald Kohn, 62, the mortgage and home-equity loan boom was one of the marvels of an efficient financial system, which translated the Fed's low interest-rate policies into accessible credit, according to their speeches in 2003.

Both men have turned cautious this year. ``Capital gains do not finance capital investment,'' Greenspan said in testimony to the House Financial Services Committee last week, noting that a rise in net worth doesn't substitute for saving. ``Clearly, our savings rate is inadequate and we must address that over the long run,'' he said.

Greenspan has pointed this year to ``unsustainable'' house prices and to signs of ``froth'' in some local real-estate markets.

``A sustained rate of saving of less than 2 percent is too low for households to accumulate enough wealth to maintain their standard of living,'' Kohn said in an April 22 speech entirely devoted to economic imbalances. ``Unless, of course, those households are lucky enough to receive outsized capital gains on their homes and other assets.'' Such gains are ``not likely,'' he added.

`Irrational Exuberance'

Such verbal warnings from the Fed have had little effect on asset prices in the past. Greenspan's ``irrational exuberance'' comment about the stock market in December 1996 was followed by a 98 percent gain in the Standard and Poor's 500 stock index over the next three years.

Average U.S. home prices rose 12.5 percent during the first quarter of 2005 from a year earlier, the fourth consecutive quarter that gains exceeded 10 percent, according to the Office of Federal Housing Enterprise Oversight in Washington. Over the past year, 24 U.S. states recorded home-price gains of more than 10 percent, ranging from 10.5 percent in Montana to 31.2 percent in Nevada.

Economists say consumers may be acting rationally, using tax- favored mortgage debt to stock up on property where returns in most markets exceed stocks, money funds and other assets. What's worrisome is that the trend is far from balanced and has implications for economic growth.

Tangible Assets

Starting in 1999, increases in household debt to buy tangible assets such as homes and cars exceeded purchases of more liquid financial instruments such as mutual funds, which channel cash to American corporations and help them grow. That swung what Fed statisticians call the net financial investment position of households into negative territory in 1999 for the first time since 1946.

At a minimum, economists say, it raises questions about the long-term productivity of the U.S. economy because too much capital is being spent on housing and not enough on research, development and business investment.

``If it's corporations that weren't saving, I would be more encouraged because they invest in plants and equipment,'' says Kasriel. ``As a national economy, we are throwing beer and pizza parties every afternoon. We are investing in more and bigger houses, sports utility vehicles, and federal programs.''

The trend is also showing up in the banking system. Home and commercial property mortgages accounted for 54.4 percent of total bank loans at the end of the first quarter, a post-World War II record, according to Fed data.

Large investments in housing ``don't provide more productivity for anyone,'' says Nouriel Roubini, an economist at New York University and previously a senior economist for international affairs at the White House Council of Economic Advisers from 1998 to 1999. ``There are financial imbalances,'' and Greenspan's successor will face ``a delicate transition.''

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: July 25, 2005 00:59 EDT