Thursday, March 15, 2007
THIS STUFF IS ALL HIS FAULT!!!!)
Greenspan Expects Subprime Mortgage Fallout to Spread
By Steve Matthews and Scott Lanman
March 15 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he expects the fallout from subprime-mortgage defaults to spread to other parts of the economy, especially if home prices decline.
``If prices go down, we will have problems -- problems in the sense of spillover to other areas,'' Greenspan said in remarks to the Futures Industry Association meeting in Boca Raton, Florida today. While he hasn't seen such spreading yet, ``I expect to.''
Subprime borrowers, or those with poor or limited credit histories, are increasingly defaulting after looser lending standards allowed them to take on more debt than they could afford. Last month, Greenspan told an audience in Toronto that ``disarray'' in the subprime mortgage market isn't likely to create greater financial instability in the rest of the economy.
``It is not a small issue,'' Greenspan said today. ``If we could wave a wand and prices go up 10 percent, the subprime mortgage problem would disappear.''
U.S. stocks pared gains after the remarks. The Standard & Poor's 500 index rose 3.54 to 1390.71 at 2:27 p.m. in New York after climbing as high as 1395.73.
Greenspan, who was Fed chairman for almost two decades until Ben S. Bernanke took over 13 months ago, has contrasted from his successor in his remarks on the economy. Greenspan said at least three times in the past month that a recession is possible. He didn't say one was likely. He said in an interview this month there's a ``one-third probability'' of a 2007 recession.
Bernanke said on March 2 that the central bank sees no ``spillover'' from the rising delinquencies in subprime mortgages. ``We're obviously going to watch it very carefully,'' he added. He told lawmakers Feb. 28 he expects the growth to accelerate. The Fed forecasts the economy will grow between 2.5 percent and 3 percent this year.
Greenspan declined to comment when asked about short-term interest rates. ``Since I left the Fed, the one question I haven't answered is that one,'' he said. The Fed has kept its benchmark rate unchanged for five straight meetings after ending a two-year campaign of increases in August.
Greenspan's speeches mark a return to economic forecasting, a role he enjoyed before entering government service during the administration of President Gerald R. Ford in 1974. Since retiring in January 2006, Greenspan, 81, has been working on a book, ``The Age of Turbulence,'' scheduled for publication in September, and speaking to companies and business groups.
It's ``quite remarkable that we have not seen impact on personal consumption'' from the broader housing slump, Greenspan said today. The boom in home prices from 2001 to 2005 accounted for a ``fairly significant'' portion of consumer spending, he said. ``At the moment we are not seeing impact'' on consumption, he said.
``One must assume a fairly substantial drop in subprime- mortgage originations'' is happening by now, he said.
Yesterday, the Mortgage Bankers Association said U.S. subprime borrowers fell behind on their mortgages at the highest rate in four years in the fourth quarter and foreclosures begun on all types of home loans rose to an all-time high.
More than 20 lenders have closed or sought buyers since the start of 2006 as consumers with spotty credit have trouble meeting mortgage payments.
On March 7, Greenspan told a technology conference in New York that the U.S. housing market may have reached a bottom, Reuters reported, repeating an observation he made in Canada last month.In a wide-ranging question-and-answer session at the Futures Industry Association meeting, Greenspan conceded it was "hard to find any such evidence" about spillover from stressed mortgages yet, but: "You can't take 10 percent out of mortgage originations without some impact."
"I'd expect it to - I'm waiting - but the spillovers are just not there," he said. Some problems have turned up in collateralized debt markets, he added.
Greenspan said the housing downturn appeared to stem more from the recent stagnation in housing prices after years of appreciation than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.
Subprime woes were "not a small issue," said the 81-year-old policy kingpin emeritus.
The current problems seemed to result primarily from buyers who had come into lofty housing markets late in the game, Greenspan said, only after huge price run-ups that made homes less affordable.
Default rates in the subprime segment of the U.S. mortgage market have jumped in recent months as the housing industry slowed and prices fell.
At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business as a result.
The crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.
Greenspan, whose words still move markets even though he vacated the Fed chairmanship more than a year ago, said much of the strength in consumer spending over the past five years could be traced to capital gains, both realized and unrealized, on surging housing prices.
If home prices keep falling, there could be more of an impact on the broader economy's momentum, he indicated. Consumer spending fuels two-thirds of national economic activity.
Greenspan declined to comment specifically on the Fed's current monetary policy or the likely direction of interest rates.
Separately, a survey found that most economic forecasters think subprime woes will spill over into the broader mortgage market, adding that they expect a corresponding fall in home prices in 2007, The Wall Street Journal reported on its Web site Thursday afternoon.
But despite that, they think the U.S. economy will not fall into recession, the report said.
On other issues, Greenspan unleashed a broadside over what he termed "archaic" procedures for settling trades in the huge over-the-counter credit derivatives market.
"I was shocked to find the credit derivatives market, which was working superbly, ends up with the settlement and clearing done with 19th century technology," Greenspan told the futures conference.
"There's an insanity out there that I don't understand," he added. He called on the New York Federal Reserve Bank, which plays a crucial role in the U.S. central bank's financial settlements procedure, to stay involved, or "we would face a really dangerous problem."
Greenspan also warned that the pending retirement of the baby boom generation would be a "seminal event" for the U.S. economy as costs of entitlement programs rise.
Successive administrations had overpromised benefits to the point where the United States faces a "serious ethical problem," he said.
To contact the reporters on this story: Steve Matthews in Boca Raton, Florida, atLast Updated: March 15, 2007 14:44 EDT Scott Lanman in Washington at .