By Edmund Conway,Telegraph.co.uk, Economics Editor | 18 September 2007
Alan Greenspan is warning that inflation is set to double. The former Federal Reserve chairman predicts that within only a few years the world will undergo a huge spike in prices. He says central banks will have to raise interest rates to double-digit levels to hold down inflation.
In an exclusive interview with The Daily Telegraph, he predicts Mervyn King will miss the Bank of England inflation target countless times in the coming years as the Governor tries to keep UK prices under control. He also:
- • Predicts the current credit crunch will persist much longer, for at least as long as US house prices are falling.
Greenspan admits he may have cut rates too much
• Fingers complex credit instruments and the ratings agencies that recommended them as among the main culprits for the mayhem.
• Admits he may have cut interest rates too low.
• Forecasts the dollar will continue to decline because of the size of America's current account deficit.
• Defends himself for commenting on the economy on numerous occasions since stepping down at the Fed.
- "Markets are going to start turning round and inflationary pressures are going to start to build.
"There's going to be more correspondence between the Chancellor and Mervyn King," he says, referring to the letter Mr King must write to the Chancellor when he misses the 2% inflation target.
Central banks will be able to create low inflation, "only at significantly higher real interest rates", he adds.
While the "great switch" could look something like the current credit crunch, Mr Greenspan adds that it is probably likely to hit in two or more years' time.
Alan Greenspan
The Telegraph has serialised the eagerly awaited memoirs of Alan Greenspan, who spent almost two decades at the helm of the world's biggest economy as chairman of the Federal Reserve.
In an exclusive interview with Edmund Conway, the Daily Telegraph's Economics Editor, Greenspan predicts a painful correction for the UK housing market and says the full impact of the credit crunch has yet to be felt.
LEGACY
Greenspan says critics are wrong
Greenspan has been blamed for the US sub-prime crisis. Unrepentant, he tells Edmund Conway his critics are wrong.
Audio: Greenspan defends his record
Video: Decades of turbulence at the Fed
Your view: Is Alan Greenspan to blame for the credit crunch?
UK Warning
UK housing set for a painful correction
Warning of 'difficulties' for UK home owners.
UK more vulnerable than US to crunch
Higher number of adjustable-rate mortgages raises exposure for UK economy.
Iraq
'Iraq war was about oil'
Alan Greenspan has launched a stinging attack on George W Bush and Tony Blair.
Dollar
Greenspan gives warning over dollar
Former Fed chairman expects America's deficit to catch-up with greenback.
Comment
Greenspan 'was too much the rock star'
We forget, but Greenspan first rose in Washington as a Nixon political aide.
Full transcript of interview
Exclusive extract on the 1987 crash
How I dealt with the aftermath of 9/11
In exclusive extracts from his new book, The Age of Turbulence: Adventures in a New World, Alan Greenspan, former chairman of the US Federal Reserve, tells the story of his life and times at the centre of Wall Street and Washington.
Alan Greenspan in depth
- Born before the Great Depression, he lived through the American Century and witnessed first hand many of its defining moments. For nearly 20 years he was charged with plotting a course for the US economy and was a central character in the drama of some of the greatest stockmarket booms and busts ever seen.
In exclusive extracts from his new book, The Age of Turbulence, Greenspan tells the story of his years as chairman of the US Federal Reserve, starting with the crash of 1987. Greenspan reveals how he dealt with the aftermath of 9/11, gives the inside track on the collapse of LTCM and explains his view on how to manage booms and busts.
GREENSPAN ON...
The 1987 crash
I felt like a seven-armed paperhanger, going from one phone to another. I was not inclined to panic because I understood the nature of the problems we would face.
The response
Our public statement had been painstakingly worded. It was as short and concise as the Gettysburg Address, though possibly not as stirring.
President H.W. Bush
I was saddened when I discovered that he blamed me for his [election] loss. His bitterness surprises me. I did not feel the same way about him.
President Clinton
By mid-1995 we had settled into an easy impromptu relationship. I never thought he would reappoint me.
The dotcom era
The dual forces of information technology and globalisation were taking hold.
Inspiration
The concept of irrational exuberance came to me in the bathtub. It's where I get many of my best ideas.
Overheating
It wasn't that I wanted to stand up and shout 'the stock market is over-valued' but I thought it important to put the issue on the table.
The LTCM saga
Hollywood could not have scripted a more dramatic financial train wreck.
Market mayhem
Panic in a market is like liquid nitrogen— it can quickly cause a devastating freeze.
Bursting bubbles
How do you draw the line between a healthy, exciting boom and a wanton, speculative bubble driven by the less savoury aspects of human nature?
Post-9/11
For a full year and a half we were in limbo. Growth was uncertain and weak; business and investors felt besieged.
Shopping
Consumer spending carried the economy through the post-9/11 malaise and what carried consumer spending was housing.
Sub-prime times
I was aware loosening mortgage credit terms for sub-prime borrowers increased financial risk but I believe the benefits of broadened home ownership are worth it.
The UK Government
To its credit New Labour embraced the new freedoms begun by Margaret Thatcher, tempering the historical socialist ethos with a fresh emphasis on opportunity.
On top of the world
Today London is arguably the leader in cross-border finance but New York remains the financial capital of the world.
1987...
I felt a real need to hit the ground running because I knew the Fed would soon face big decisions. The Reagan-era expansion was well into its fourth year and while the economy was thriving, it was also showing clear signs of instability.
Since the beginning of the year, when the Dow Jones Industrial Average had risen through 2,000 for the first time, the stock market had run up more than 40%. Now it stood at more than 2,700 and Wall Street was in a speculative froth. The dollar was falling, and people were worried about America losing its competitive edge— the media were full of alarmist talk about the growing "Japanese threat".
I thought a rate increase would be prudent, but the Fed hadn't raised interest rates for three years. Signs of trouble in the economy continued to mount. Slowing growth and a further weakening of the dollar put Wall Street on edge, as investors and institutions began confronting the likelihood that billions of dollars in speculative bets would never pay off.
In early October, that fear turned to near panic. The worst loss was on Friday, October 16, when the Dow Jones average dropped by 108 points. Since the end of September nearly half a trillion dollars of paper wealth had evaporated in the stock market alone, not to mention the losses in currency and other markets.
I was supposed to fly on Monday afternoon to Dallas. That morning I conferred with the Board of Governors, and we agreed that I should make the trip, lest it seem that the Fed was in a panic. There was no telephone on the plane. So the first thing I did when I arrived was to ask one of the people who greeted me from the Federal Reserve Bank of Dallas: "How did the stock market finally go?" He said: "It was down five oh eight."
Usually when someone says "five oh eight," he means 5.08. So the market had dropped only 5 points. "Great," I replied. "What a terrific rally." But as I said it, I saw that the expression on his face was not shared relief. In fact, the market had crashed by 508 points, a 22.5% drop, the biggest one-day loss in history and bigger even than on the day that started the Great Depression, Black Friday 1929.
I went straight to the hotel, where I stayed on the phone into the night.
I was not inclined to panic, because I understood the nature of the problems we would face. Still, when I hung up the phone around midnight, I wondered if I'd be able to sleep. That would be the real test. "Now we're going to see what you're made of," I told myself as I went to bed, and, I'm proud to say, I slept for a good five hours.
The next thirty-six hours were intense. I joked that I felt like a seven-armed paperhanger, going from one phone to another, talking to the stock exchange, the Chicago futures exchanges, and the various Federal Reserve presidents. My most harrowing conversations were with financiers and bankers I'd known for years, major players from very large companies around the country, whose voices were tightened by fear.
The Fed attacked the crisis on two fronts. Our first challenge was Wall Street: we had to persuade giant trading firms and investment banks, many of which were reeling from losses, not to pull back from doing business. Our public statement early that morning had been painstakingly worded to hint that the Fed would provide a safety net for banks, in the expectation that they, in turn, would help support other financial companies.
It was as short and concise as the Gettysburg Address, I thought, although possibly not as stirring: "The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."
But as long as the markets continued to function, we had no wish to prop up companies with cash. As all this was going on, we were careful to keep supplying liquidity to the system. The FOMC ordered the traders at the New York Fed to buy billions of dollars of treasury securities on the open market. This had the effect of putting more money into circulation and lowering short-term rates.
On Wednesday morning Goldman Sachs was scheduled to make a $700m payment to Continental Illinois Bank in Chicago, but initially withheld payment pending receipt of expected funds from other sources. Then Goldman thought better of it, and made the payment. Had Goldman withheld such a large sum, it would have set off a cascade of defaults. Subsequently, a senior Goldman official confided to me that had the firm anticipated the difficulties of the ensuing weeks, it would not have paid. And in future such crises, he suspected, Goldman would have second thoughts about making such unrequited payments.
It took well over a week for all the crises to play out, though most of them were hidden from public view. Days after the crash, for example, the Chicago options market nearly collapsed when its biggest trading firm ran short of cash. The Chicago Fed helped engineer a solution to that one.
Contrary to everyone's fears, the economy held firm, actually growing at a 2% annual rate in the first quarter of 1988 and at an accelerated 5% rate in the second quarter. Economic growth entered its fifth consecutive year.
However, this strong economic growth was not to last. As the 1980s came to an end, the US economy slowed dramatically, and by the early 1990s tipped into recession. To make matters worse, the banking system was in turmoil, with hundreds of small and medium-sized banks failing and giants like Citibank and Chase Manhatten in distress. Meanwhile, the real estate boom had collapsed, causing even more pain.
Nothing we did at the Fed seemed to work. We'd begun easing interest rates well before the recession hit, but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than 23 times in the three-year period between July 1989 and July 1992, the recovery was one of the most sluggish on record. I would see President George Bush every six or seven weeks, usually in the context of a meeting with others but sometimes one-on-one. Before long, the administration began blaming its troubles on the Fed. Supposedly we were choking the economy by keeping the money supply too tight.
When the recession hit that fall, the friction only got worse. "There has been too much pessimism," President Bush declared in his 1991 State of the Union address. "Sound banks should be making sound loans now, and interest rates should be lower, now."
The Fed, of course, had been lowering rates for over a year, but the White House wanted more, faster cuts. Nonetheless, President Bush reappointed me. I think he concluded I was his least worst choice: the Fed itself by all accounts was functioning well, there was no other candidate whom Wall Street seemed to prefer, and a change would have roiled the markets.
The fact was, the economy was recovering, just not in time to save the election.
I was saddened years later when I discovered that President Bush blamed me for his loss. His bitterness surprised me; I did not feel the same way about him. His loss in the election reminded me of how voters in Britain had ousted Winston Churchill immediately after the Second World War. Quite rapidly, however, the dual forces of information technology and globalisation were beginning to take hold, and as President Bill Clinton later put it: "The rulebooks were out of date." By mid-1995, Clinton and I had settled into an easy, impromptu relationship. He believed dotcom millionaires were an inevitable by-product of progress. "Whenever you shift to a new economic paradigm, there's more inequality," he'd say. Now we were shifting into the digital age, so we had dotcom millionaires.
Politics being what they are, I never thought Clinton would reappoint me as chairman when my term ended in March 1996. He was a Democrat and no doubt he would want one of his own. But by the end of 1995, my prospects had changed. American business was doing exceptionally well. GDP growth was starting to revive without a recession. The relationship between the Fed and the Treasury had never been better.
President Clinton set a little challenge for me and for the two Fed officials he appointed at the same time. "There is now a debate, a serious debate in this country, about whether there is a maximum growth rate we can have over any period of years without inflation," the President told reporters. It wasn't hard to read between the lines. With the economy entering its sixth year of expansion, and with the soft landing looking real, he was asking for faster growth, higher wages, and new jobs. He wanted to see what this rocket could do.
Even rising productivity could not explain the looniness of stock prices. On October 14, 1996, the Dow Jones Industrial Average vaulted past 6,000. If you compared the total value of stock holdings with the size of the economy, the market's significance was increasing at a rapid rate: at $9.5?trillion, it now was 120% as large as GDP.
We'd now seen the Dow break through three "millennium marks"– 4,000, 5,000, and 6,000— in just over a year and a half. Though economic growth was strong, we worried that investors were getting carried away. It wasn't that I wanted to stand up and shout, "The stock market is overvalued and it will lead to no good." I didn't believe that. But I thought it important to put the issue on the table.
The concept of irrational exuberance came to me in the bathtub one morning as I was writing a speech. To this day, the bathtub is where I get many of my best ideas. After the Dow had broken 6,000, in mid-October 1996, I'd begun looking for an opportunity to speak up about asset values. I wrote the speech so that the issue of asset values accounted for only a dozen sentences toward the end, and I carefully hedged what I had to say in my usual Fedspeak. Yet when I showed the text to Alice Rivlin [director of Office of Management and Budget] on the day of the speech, "irrational exuberance" jumped right out at her. "Are you sure you want to say this?" she asked.
On the podium that night, I delivered the key passage, watching carefully to see how people would react. But the stock market did not slow down, which only reinforced my concern.
The Dow Jones was already nearing 7,000 when the FOMC convened for the first time in 1997, on February 4. Apart from the run-up in the stock market, the economy was as robust as it had been six months before, when I'd resisted the idea of tightening rates. But my concern about a bubble had changed my mind. I told the committee we might need an interest rate increase to try to rein in the bull.
The Fed does not operate in a vacuum. If we raised rates and gave as a reason that we wanted to rein in the stock market, it would have provoked a political firestorm. Then we met again on March 25 and raised short-term rates by 0.25%, to 5.5%. In late March and early April of 1997, right after our meeting, the Dow dipped by some 7%. This represented a loss of almost 500 points, to some minds a delayed reaction to our rate hike. But within a few weeks, the momentum shifted and the market came roaring back. In effect, investors were teaching the Fed a lesson. Bob Rubin [Secretary of the Treasury] was right: you can't tell when a market is overvalued, and you can't fight market forces. We looked for other ways to deal with the risk of a bubble. But we did not raise rates any further, and we never tried to rein in stock prices again.
Margaret Thatcher jolted Britain toward a capitalist paradigm. I first encountered Thatcher at a British Embassy function in Washington in September 1975, shortly after she became the Conservative Party's leader. And an encounter it was. Seated next to her at dinner, I was prepared for a dull evening with a politician. "Tell me, Chairman Greenspan," she asked. "Why is it that we in Britain cannot calculate M3?" I awoke. M3 is an arcane measure of money supply embraced by followers of Milton Friedman.
We spent the evening discussing market economics and the problems confronting the British economy. My favourable initial impressions of Thatcher were reinforced after she became Prime Minister. Elected to that office in 1979, she confronted Britain's sclerotic economy head-on. Her seminal battle was with the miners who went on strike in March 1984 following her announcement of the closing of some unprofitable government-owned coal mines.
Thatcher's embrace of market capitalism gained the grudging acceptance of the British electorate. Her spectacular run was finally undermined not by the general British electorate but by a revolt within the Conservative Party.
She remained bitter toward those who removed her from power.
In the fall of 1994, Gordon Brown and Tony Blair trekked into my office at the Federal Reserve. As we exchanged greetings, it appeared to me that Brown was the senior person. Blair stayed in the background while Brown did most of the talking about a "new" Labour. Gone were the socialist tenets of post-war Labour leaders.
Brown espoused globalisation and free markets and did not seem interested in reversing much of what Thatcher had changed.
In office from 1997 forward, Tony Blair and Gordon Brown, heads of a rejuvenated and far more centrist Labour Party, accepted Thatcher's profoundly important structural changes to British product and labour markets.
In fact Brown, the Chancellor of the Exchequer for a record number of years, appeared to revel in Britain's remarkable surge of economic flexibility.
By mid-August 1998 the Russian central bank had burned through more than half of its foreign exchange reserves. Frenzied last-minute diplomacy failed, and on August 26 the central bank withdrew support for the ruble. The exchange rate fell 38% overnight. The default, when it came, stunned investors and banks that had poured money into Russia in spite of the risks. Many operated on the assumption that the West would always bail out the fallen superpower— if for no other reason, the saying went, than that Russia was "too nuclear to fail". Those investors bet wrong.
After careful deliberation, President Bill Clinton and other leaders judged that the International Monetary Fund's withdrawal would not increase the nuclear risk, and approved its decision to pull the plug. We all held our breath.
Sure enough, the shock wave from Russia's default hit Wall Street much harder than the Asian crises had. In the last four trading days of August alone, the Dow lost more than 1,000 points, or 12% of its value. The threat of a worldwide recession seemed increasingly real to me. And I was convinced that the Fed did not have the power to cope alone.
Bob Rubin [Secretary of the Treasury] shared this view. Behind the scenes, he and I began contacting the finance ministers and central bankers of the G7 nations to try to coordinate a policy response. We argued for the need to increase liquidity and ease interest rates throughout the developed world. Some of our counterparts proved very difficult to convince. But at last, as the markets in Europe closed on September 14, the G7 issued a carefully written statement. "The balance of risks in the world economy has shifted," it declared.
Meanwhile Bill McDonough, the head of the New York Fed, took on the challenge of coping with the implosion of one of Wall Street's largest and most successful hedge funds, Long-Term Capital Management.
Hollywood could not have scripted a more dramatic financial train wreck. Despite its boring name, LTCM was a proud, high-visibility, high-prestige operation in Greenwich, Connecticut, that earned spectacular returns investing $5bn for wealthy clients. Among its principals were two Nobel laureate economists, Myron Scholes and Robert Merton, whose state-of-the-art mathematical models were at the heart of the firm's money machine.
LTCM specialised in risky, lucrative arbitrage deals in US, Japanese and European bonds, leveraging its bets with more than $120bn borrowed from banks. It also carried some $1.25 trillion in financial derivatives, exotic contracts that were only partly reflected on its balance sheet. Some of these were speculative investments, and some were engineered to hedge, or insure, LTCM's portfolio against every imaginable risk. (Even after the smoke cleared, no one ever knew for sure how highly leveraged LTCM was when things started to go wrong. The best estimates were that it had invested well over $35 for every $1 it actually owned.)
The Russian default turned out to be the iceberg for this financial Titanic. That development contorted the markets in a way even the Nobel winners had never imagined. The story of how McDonough godfathered LTCM's bailout by its creditors has been told so many times that it is part of Wall Street lore. He literally gathered top officials of 16 of the world's most powerful banks and investment houses in a room, suggested strongly that if they fully comprehended the losses they would face in a forced fire sale of LTCM's assets, they would work it out, and left. After days of increasingly tense negotiations, the bankers came up with an infusion of an additional $3.5bn for LTCM as they carefully unwound its 'bets'.
No taxpayer money was spent (except perhaps for some sandwiches and coffee), but the Fed's intervention touched a populist raw nerve. "Seeing a Fund as Too Big to Fail, New York Fed Assists Its Bailout," trumpeted the New York Times on its front page. A few days later, on October 1, McDonough and I were called before the House Banking Committee to explain why, as USA Today put it, "a private firm designed for millionaires [should] be saved by a plan that was brokered and supported by a federal government organisation".
But telling the banks involved with LTCM that they might save themselves money if they facilitated an orderly liquidation of the fund was by no stretch of the imagination a bailout. By facing the harsh reality and acting in their self-interest, they saved themselves and, I suspect, millions of their fellow citizens on both Main Street and Wall Street a lot of money.
I was tracking the signs of trouble in the financial world with mounting concern for how all this might damage the economy. Panic in a market is like liquid nitrogen— it can quickly cause a devastating freeze. And indeed, the Fed's research was already showing that banks were increasingly hesitant to lend.
It took no argument at all to get the FOMC to lower interest rates. We did so three times in rapid succession, between September 29 and November 17. Other European and Asian central banks, honouring their new G7 commitment, also eased their rates. Gradually, as we'd hoped, the medicine took hold. The world's markets calmed down, and a year and a half after the Asian crises began, Bob Rubin was finally able to take an uninterrupted family vacation.
The [follow on] boom rose to a crescendo late in 1999, with the NASDAQ stock market index at the end of December having nearly doubled in 12 months (the Dow rose 20%). This presented the Fed with a fascinating puzzle: how do you draw the line between a healthy, exciting economic boom and a wanton, speculative stock market bubble driven by the less savoury aspects of human nature?
I'd given a lot of thought to whether we were experiencing a stock-market bubble and, if we were, what to do about it. If the market were to fall 30% or 40% in a short time, I reasoned, I'd be willing to stipulate that, yes, there had been a bubble. But this implied that if I wanted to identify a bubble, I had to confidently predict that the market was going to drop by 30% or 40% in a short time. That was a tough position to take.
Even if the Fed were to decide there was a stock bubble and we wanted to let the air out of it, would we be able to? If Fed tightening could not knock stock prices down by weakening the economy and profits, owning stocks became a seemingly ever less-risky activity. A giant rate hike would be a different story. I had no doubt that by abruptly raising interest rates by, say, 10 percentage points, we could explode any bubble overnight. But we would do so by devastating the economy, wiping out the very growth we sought to protect. Unless the tightening broke the back of the economic boom and with it profits, an incremental tightening would, in my experience, reinforce the perceived power of the boom. Modest tightening was more likely to raise stock prices than to lower them.
After thinking a great deal about this, I decided that the best the Fed could do would be to stay with our central goal of stabilising product and services prices. By doing that job well, we would gain the power and flexibility needed to limit economic damage if there was a crash. In the event of a major market decline, we agreed, our policy would be to move aggressively, lowering rates and flooding the system with liquidity to mitigate the economic fallout. But the idea of addressing the stock-market boom directly and pre-emptively seemed out of our reach.
I'd come to realise we'd never be able to identify irrational exuberance with certainty, much less act on it, until after the fact. Ironically, very soon afterward, we ended up tightening interest rates all the same. But stock prices were largely undeterred— they didn't peak until March 2000, and even then the bulk of the market moved sideways for several months more.
Then came September 11, 2001.
For a full year and a half after September 11, 2001, we were in limbo. The economy managed to expand, but its growth was uncertain and weak. Businesses and investors felt besieged. Behind everything loomed the expectation of continued terrorist attacks on US soil. There was no bigger question in Washington than, Why no second attack? If al Qaeda's intent was to disrupt the US economy, as bin Laden had declared, the attacks had to continue. The Fed's response to all this uncertainty was to maintain our programme of aggressively lowering short-term interest rates. This extended a series of seven cuts we'd already made in early 2001 to mitigate the impact of the dotcom bust and the general stock market decline. After the September 11 attacks, we cut the Fed funds rate four times more, and then once again at the height of the corporate scandals in 2002.
By October of that year, the Fed funds rate stood at 1.25%, a figure most of us would have considered unfathomably low a decade before. Yet, the economy was clearly in the grip of disinflation, in which market forces combine to hold down wages and prices and cause inflation expectations, and hence long-term interest rates, to recede. Globalisation was exerting a disinflationary impact.
This was the possibility that the US economy might be entering a crippling spiral like the one we'd seen paralyze Japan for 13 years. I found it to be a very unsettling issue. At the FOMC meeting in late June, where we voted to reduce interest rates still further to 1%, deflation was Topic A. We agreed on the reduction despite our consensus that the economy probably did not need still another rate cut. Yet we went ahead on the basis of a balancing of risk. We wanted to shut down the possibility of corrosive deflation; we were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address.
Consumer spending carried the economy through the post-9/11 malaise, and what carried consumer spending was housing. In many parts of the United States, residential real estate, energised by the fall in mortgage interest rates, began to see values surge. The market prices of existing homes rose 7.5% a year in 2000, 2001, and 2002, more than double the rate of just a few years before. Not only did construction of new houses rise to record levels, but also historic numbers of existing houses changed hands. This boom provided a big lift in morale— even if your house was not for sale, you could look down the block and see other people's homes going for what seemed like astonishing prices, which meant your house was worth more too.
By early 2003, thirty-year mortgages were below 6%, the lowest they'd been since the Sixties. Adjustable-rate mortgages cost even less. This spurred the turnover of houses that drove prices higher. This expansion of ownership gave more people a stake in the future of our country and boded well for the cohesion of the nation, I thought.
Capital gains, especially gains realised in cash, began burning holes in people's pockets. Soon statisticians could see a bulge in consumer spending that matched the surge in capital gains. This pickup in outlays was virtually all funded through increases in home mortgage debt, which financial institutions made particularly easy to tap.
Booms, of course, beget bubbles, as the owners of dotcom stocks had painfully learned. Were we setting ourselves up for a harrowing real estate crash?
The market for single-family homes in the United States had always been predominately for home ownership, with the proportion of purchases for investment or speculation rarely more than 10%. But by 2005, investors accounted for 28% of homes bought, according to the National Association of Realtors.
Whether a bubble or a froth, the party was winding down by late 2005, when first-time buyers began to find prices increasingly out of reach. Higher prices required larger mortgages, which began to claim a burdensome share of monthly income. Because of the housing boom and the accompanying explosion in new mortgage products, the typical American household ended up with a more valuable home and better access to the wealth it represented. More recently, the unwinding of the housing boom has hurt some groups. It did not create great difficulties for the great mass of homeowners who had built up substantial equity in their houses as prices rose.
But many low-income families who took advantage of sub-prime mortgage offerings to become first-time homeowners joined the boom too late to enjoy its benefits. Without an equity buffer to fall back on, they are having difficulty making their monthly payments, and increasing numbers are facing foreclosure. Of the nearly $3 trillion of home mortgage originations in 2006, a fifth were sub-prime and another fifth were so-called Alt-A mortgages. Poor performance of this two fifths of originations has induced a significant tightening of credit availability, with a noticeable impact on home sales.
I was aware that the loosening of mortgage credit terms for sub-prime borrowers increased financial risk, and that subsidised home ownership initiatives distort market outcomes. But I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.
- [ Normxxx Here: But, I scarcely think that includes those who have lost their meager life savings in trying for "the brass ring." ]
Today London is arguably the world's leader in cross-border finance, though New York, by financing much of the vast economy of the United States, remains the financial capital of the world. Inventive technologies have dramatically improved the effectiveness with which global savings have been employed to finance global investment in plant and equipment. That improved productivity of capital has engendered increased incomes for financial expertise, and UK finance has prospered.
The large tax revenues that have emerged have been used by the Labour Government to counter the income inequality that is an inevitable by-product of increasing technologically-oriented financial competition. The per capita GDP of the United Kingdom has recently outdistanced those of Germany and France. Britain's demographics are not so dire as those of the Continent, though its education of its children has many of the shortcomings of the American system. If Britain continues its new openness (a highly reasonable expectation), it should do well in the world of 2030.
Copyright © Alan Greenspan 2007. Taken from The Age of Turbulence by Alan Greenspan, published by The Penguin Press HC (September 17, 2007)
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
No comments:
Post a Comment