Greenspan Warns Subprime Woes Could Spread

Are we going to have a repeat of the disasterous Saving and Loan scandal, which the tax payers had to bail out? ---BBB

Greenspan Warns Subprime Woes Could Spread
By Ros Krasny
Reuters
Thursday 15 March 2007

Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.

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, Greenspan 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.

On other issues, Greenspan unleashed a broadside at 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 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 over-promised benefits to the point where the United States faces a "serious ethical problem," Greenspan said.
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Additional reporting by Glenn Somerville in Washington