Greenspan sees end to falling U.S. home prices
By Scott Lanman and Lily Nonomiya
Bloomberg News Service
By Scott Lanman and Lily Nonomiya
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.
"It will not be until early 2009 that we will get close to having eliminated most of this" home inventory, Greenspan told a conference today in Tokyo sponsored by Deutsche Bank AG and co-hosted by Bloomberg LP. "But it is very likely that home prices will stabilize well before that."
The health of the U.S. housing market is tied to broader financial markets that rely on bundling mortgages to sell as securities, Greenspan said. His successor, Fed Chairman Ben Bernanke, and other Fed officials have highlighted declining home prices as a major economic risk that may further hurt household wealth and consumer spending.
"Once the markets start to stabilize, especially if the real economies don't go into a severe recession," then "we can expect a recovery to begin to take place," Greenspan, 82, said via satellite from Washington. "It will be slow, it will be hesitant."
He said the extent of damage stemming from the collapse of the subprime-mortgage market won't be known for months.
"Have we reached a point where prices are stable? We cannot know that for a couple of months," Greenspan said. "It looks as though we're going to get a very large rate of liquidation, but not until the second half of this year."
Greenspan said inflation will be contained during the current slowdown before picking up as the world economy recovers.
"It's difficult to imagine any major breakout of inflation as economic slack continues to increase," he said. "What we will see is gradually rising inflationary pressures that will probably be subdued during the current period of slack, but that will surely re-emerge when economies pick up."
Greenspan, who retired in 2006 after 18 years as the U.S. central bank chief, has come under increasing criticism for his policies as last year's subprime-loan meltdown spread into a broader financial crisis. One recent book, "Greenspan's Bubbles" by money manager William Fleckenstein, argues the former Fed chief helped inflate stock and home prices.
In response to the bursting of the Internet and technology bubble and the Sept. 11 terrorist attacks, Greenspan lowered the Fed's key rate in 2001 from 6.5 percent to 1.75 percent, then reduced it further in 2003 to 1 percent, a 45-year low.
He left the rate there for a year before starting to raise borrowing costs in quarter-point increments, leaving it to Bernanke to decide when to stop. Some Fed critics, such as Bear Stearns Cos. economist John Ryding, say rates were too low for too long, encouraging the easy credit that helped inflate a housing bubble and has now returned to burn investors.
Greenspan, who published his memoir "The Age of Turbulence" in September, has taken to defending his legacy in newspaper opinion articles.
In a Sunday Financial Times piece headlined "The Fed is blameless on the property bubble," Greenspan wrote that the evidence is "very fragile" that Fed interest-rate policy added to the U.S. bubble and that "it is not credible that regulators would have been able to prevent the subprime debacle."
Greenspan said yesterday that "the current credit crisis is the most wrenching in the last half century and possibly more."
Such remarks echo the assessments of economists including those at the International Monetary Fund, and may add to pressure on policymakers to strengthen their response to the credit crunch. Fed officials last week acknowledged that capital markets remain distressed even after the fastest interest-rate cuts in two decades, and may be rethinking their aversion to acting against asset-price bubbles.
After last month's near-collapse of Bear Stearns, Minneapolis Fed Bank President Gary Stern — the longest-serving policymaker — said on March 27 that it's possible "to build support" for practices "designed to prevent excesses."
Greenspan, in Sunday's Financial Times piece, reiterated his doubts about taking a more active role in leaning against asset bubbles.
At least 14 banks and securities firms have sought cash from outside investors in the past year after more than $230 billion of global markdowns and losses caused by the collapse of the U.S. subprime mortgage market, Bloomberg data show.
Bernanke, 54, told Congress last week that the U.S. economy may contract in the first half of 2008 and for the first time acknowledged the chance of a recession.