Alan Greenspan speaks

From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said the drop in U.S. home prices will probably end "well before” early next year as the number of houses on the market diminishes, aiding an economic rebound.

Does this offer us some hope? Not really, because Greenspan also said the recovery will be "slow and hesitant".

Did Alan Greenspan caused the bubble which is burst now? He defended the increasing criticism in an article published at Financial Times:

The former Fed chairman says the most likely cause of this global house price boom was a “dramatic fall in real long term interest rates” around the world, which he believes was caused by abundant global savings.

In any event, Mr Greenspan says, it is only with hindsight that it looks like the US economic recovery was well enough entrenched before 2004 to allow the Fed to start raising interest rates sooner than it did.

“With inflation falling to quite low levels, that was not the way the pre-2004 period was experienced at the time,” he says.

In his article, Mr Greenspan reaffirms his long-held belief that central banks cannot effectively “lean against the wind” by setting monetary policy a little tighter than it would otherwise have been during asset price booms.

However, he writes “if it turns out it is feasible” to conduct monetary policy in this way, “I would become a strong supporter of leaning against the wind.”

Mr Greenspan also takes issue with those who blame lax regulation by the Fed for allowing a serious deterioration in underwriting standards in the mortage industry. The problem, Mr Greenspan argues, “is not the lack of regulation, but unrealistic expectations about what regulators are able to prevent”.

The former Fed chief says the core of the subprime problem “lies with the misjudgments of the investment community”. The scramble to invest in what were initially highly profitable subprime loans would have overwhelmed any regulatory effort to slow the growth of this sector, he claims.

Mr Greenspan says the “fierceness” of the retreat from risk since the crisis began in August “surprised” him and had “shaken” his view of the range of possible economic outcomes.

But he remained firmly of the view “that free competitive markets are the unrivalled way to organise economies”.

After all, sometimes we would never know who is right, and who is wrong.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.