By Steven Russolillo 

Twenty years ago, Alan Greenspan was worried about stocks. Today, he is far more concerned about the bond market.

Monday marks the anniversary of the former Federal Reserve chairman's famous speech about "irrational exuberance," in which he wondered whether asset prices were reaching unsustainable levels. The phrase has since transcended Wall Street, Main Street and even the best-seller list, claiming a place as one of the most iconic in financial markets.

His call was spectacularly wrong -- at first.

"If you rate me on my irrational exuberance forecast, I get a C," Mr. Greenspan said in an interview with The Wall Street Journal. "But analytically, it was describing a process that I thought we had to be very concerned about."

Mr. Greenspan, who ran the Fed from 1987 to 2006, admitted that he chose those words for their shock value. "I was acutely aware of the fact that that particular phrase was put in that speech to spook the market," he said.

It didn't work. Stocks slumped briefly, but quickly rebounded. By August 1997, with the S&P 500 up 27% since his speech, the phrase was appearing in news outlets on average about twice a day -- a lot back in those days, according to Sebastian Mallaby, a senior fellow at the Council on Foreign Relations.

"The more the cliché was repeated, the more the market seemed to soar," Mr. Mallaby wrote in his recently released Greenspan biography. "If Greenspan's attempt to slow the rally had been reduced to an ironic meme, surely there was nothing that could stop it."

Stocks rallied for more than three years before the dot-com bubble finally burst in 2000. That was followed by the even more spectacular collapse of the housing market and the ensuing financial crisis in 2008.

"Irrational exuberance," which Mr. Greenspan came up with in his bathtub one morning as he was writing a speech, continues to resonate. A Google search for the phrase generates 390,000 results. Yale economist and Nobel Prize winner Robert Shiller wrote a book in 2000 by that name. And when Mr. Greenspan retired from the Fed, "The Daily Show" ran an entire segment titled "An Irrationally Exuberant Tribute to Alan Greenspan."

The 90-year-old Mr. Greenspan, who remains active at his company Greenspan Associates LLC, declined to comment specifically about the Fed or politics.

While he isn't as worried about stocks today as he was in the mid-1990s, he is far more concerned about the bond market and the recent sharp rise in interest rates. "The key is not the S&P 500. It's the 10-year note and 30-year bond that matter," he said. "The only thing which is way out of line is the price/earnings ratio in the bond market. And that is not an insignificant factor."

He is also concerned that the economy could be headed for a period of stagflation -- rising prices coinciding with weak growth. "The odds are better than 50/50," Mr. Greenspan said. "At this stage, that's what I worry about."

But Mr. Greenspan maintains the hands-off attitude he has expressed in the wake of the housing collapse. "Once a bubble emerges, it is difficult to do anything to stop it that won't have a major negative impact on the economy," he said. "The best thing to do is to let it run its course and address the consequences when they occur."

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

December 03, 2016 09:14 ET (14:14 GMT)