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It wasn’t me, Greenspan says of housing mess

Sales and price slump not a reflection of Fed policies when he headed central bank

LONDON – FORMER Federal Reserve chairman Alan Greenspan said he has ‘no particular regrets’, and that the deepening slump in the United States housing market is not a result of his policies.

‘Markets are becoming aware of the fact that the decline in house prices is not stopping,’ he said on Sunday. ‘I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.’

Home prices fell in a third of US cities last quarter, as stricter lending standards caused a 14 per cent drop in sales nationwide, the National Association of Realtors said last week.

Declines in sales and prices signal that the housing slump, which began last year, may extend into its third year, matching the slowdown 18 years ago that ended in the 1991 recession.

The collapse of the US sub- prime market ‘was a shocker because no one expected it’, Mr Greenspan said. ‘It was the weakest link in the international financial sector. The decline in subprime-financed housing starts is over. It went to zero and can’t get any lower.’

Professor Joseph Stiglitz, a Nobel Prize-winning economist, said on Nov 16 that there was a 50 per cent chance the US would slide into a recession after the ‘mess’ left by Mr Greenspan. The retired Fed chairman defended his record in a statement released the same day, saying the criticisms were ‘inaccurate or incomplete’.

After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 per cent. That move, along with a hands-off approach to regulation, has put Mr Greenspan under fire as the bursting of the housing bubble and the sub-prime mortgage crisis threaten to sink the economy.

‘The fact that the Fed funds rate went down to 1 per cent in 2002 was an important part of the latter stages of the housing boom,’ said Mr Bruce Kasman, chief economist at JPMorgan Securities. ‘It wasn’t the only thing, and it wasn’t necessarily a bad thing. In the end, we’re going to look back at what happens next to recognise what the trade-offs were.’

The US dollar’s slump to a record low against the euro may have to be addressed by central bank policymakers, according to Mr Greenspan. ‘Stable prices are necessary for maximum sustainable economic growth,’ he said.

Mr Greenspan, 81, is on a world tour to promote his memoirs.

 

Source: BLOOMBERG NEWS (The Straits Times 27 Nov 07)

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