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Greenspan: 'credit tsunami' to have severe impact

Greenspan: 'credit tsunami' to have severe impact

Former Federal Reserve Chairman Alan Greenspan told the U.S. Congress in prepared testimony Thursday that the current global financial crisis is a 'once in a century credit tsunami' that policymakers did not anticipate.
Greenspan was to be the leadoff witness at a House hearing lawmakers called to question past key financial players about what they felt caused the most grave financial crisis since the 1930s. The witnesses were also expected to be asked how they thought the government would deliver the nation from the economic turmoil.
Greenspan was the chairman of the Federal Reserve for 18 1/2 years. In testimony prepared for the House Government Oversight and Reform Committee, he voiced shock over the present turn of events and called conditions deplorable.
He said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief." And Greenspan also blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.
"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."
He said that a necessary condition for the crisis to end will be a stabilization in home prices but he said that was not likely to occur for "many months in the future."
When home prices finally stabilize, Greenspan added, then "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards reengagement with risk."
Greenspan said until that occurs the government is correct to move forward aggressively with efforts to support the financial sector. He called the $700 billion rescue package passed by Congress on Oct. 10 "adequate to serve the need" and said that its impact was already being felt in markets.
In his written testimony, Greenspan did not specifically address the criticism he is receiving now as being partly to blame for the current crisis.
Greenspan's critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.
In his testimony, Greenspan put the blame for the subprime collapse on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.
"It was the failure to properly price such risky assets that precipitated the crisis," he asserted.


Updated : 2021-10-16 05:23 GMT+08:00