Friday, January 25, 2008


Greenspan on the Defensive

Greenspan on the Defensive

Thursday, January 24, 2008

VANCOUVER — The biggest barrier to stabilizing the chaotic U.S. housing market is the oversupply of homes that cash-strapped builders are flogging at rock-bottom prices, former Federal Reserve chairman Alan Greenspan says.

“If there were some kind of alchemy whereby we could pick up all these 300,000 units, that would stabilize the markets,” Mr. Greenspan told a Vancouver audience on Thursday. He was referring to the number of homes in the U.S. that were estimated to be under or near construction when the subprime mortgage market began to unravel.

With those homes subject to vandalism and requiring expensive upkeep, builders are desperate to clear out the inventory, he said, saying that the prolonged slump could be nearing its end.

“We may be close to a point where actual sales levels are starting to bottom,” he said. “We don't have to get rid of it all, we do have to get to maximum rate of liquidation.”

Mr. Greenspan also defended much-reviled subprime mortgages, which were typically extended to borrowers who wouldn't qualify for conventional loans. The loans included products such as interest-only mortgages that allow lenders to pay only the interest for a period of time and other products that start off with a low interest rate and later convert to higher rates.

The products were valuable because they made it easier for more people to buy homes, he said.

But what started out as a niche product took off, snowballing as financial players such hedge funds saw an opportunity in the products and created a bigger pool of products, he said.

“The hedge funds put pressure on the securitizers for more paper and the securitizers turned to lenders and said, ‘we need more paper – whatever you can get, we will take.' Underwriters' standards collapsed,” he said.

In his remarks, Mr. Greenspan admitted he was caught off guard by the rapid growth in subprime mortgages, saying there was a lengthy delay in data coming in on the products and that when he finally saw official tallies, “he couldn't quite believe it.”

Mr. Greenspan also denied being a booster for risky mortgage products, saying that while he noted advantages in some new mortgage products in an often-referenced 2004 speech, he spoke out in favour of conventional mortgages in an address a week later that has been ignored.

While Mr. Greenspan said there is at least a 50-per-cent chance of a recession in the U.S., he did said a recession would be short and shallow because consumer demand and global markets are strong.

Asked about the U.S. government's efforts to stimulate the economy with tax rebates and tax cuts, Mr. Greenspan said such steps are “not likely to significantly support home sales” but would likely increase consumption.

Mr. Greenspan, 81, was speaking to a business audience of about 1,450 in Vancouver. The address, a question-and-answer session with Sherry Cooper, chief economist at BMO Nesbitt Burns Inc., marked his first public appearance since last week's global market turmoil and Monday's historic rate cut by the U.S. Federal Reserve Board.

The drop of three-quarters of a percentage point in the Fed's key interest rate, to 3.5 per cent, was credited with calming markets that were concerned about a U.S. recession and its effects on the rest of the world.

Current Federal Reserve Board chairman Ben Bernanke is expected to follow up with another next week.

The Bank of Canada also cut its key rate a quarter-point to 4 per cent at its scheduled announcement Tuesday, although some analysts had expected a steeper half-point cut. Alan Greenspan was chairman of the board of governors of the U.S. Federal Reserve from 1987 to 2006. He currently works as a private consultant for firms through his company, Greenspan Associates LLC.

In recent months, Mr. Greenspan has been criticized for implementing policies during his term, including record low interest rates, that helped fuel the subprime crisis in the United States and arguably contributed to a wider, global financial crisis now sweeping world markets.

In recent op-ed piece, Mr. Greenspan said the current crisis was “an accident waiting to happen” and was largely the result of a decades-long economic boom in the developing world.

In late 1996, he famously said “irrational exuberance” was showing up in financial markets. He was subsequently criticized for not doing enough to cool overheated markets and stave off the technology market crash at the beginning of this decade.

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