I didn’t learn anything new from this, but perhaps it’ll be interesting to some.
Alan Greenspan wrote a column on the subprime loan crisis and state of the US economy for the Wall Street Journal.
Former Federal Reserve chief Alan Greenspan wrote a lengthy explanation of his view of the current mortgage crisis for The Wall Street Journal.
“The crisis was an accident waiting to happen,” Greenspan writes. “If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market.”
Here are some other key passages:
* “I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1 percent rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.”
* “Demand in those days was driven by the expectation of rising prices — the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).”
* “The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.”
Source: Not my fault – By Alan Greenspan, The Wall Street Journal, by way of Realtor.org