Greenspan: Yes, Virginia, There Was a Housing Bubble

In an interview prior to the Monday release of his memoir, The Age of Turbulence: Adventures in a New World, former Fed Chairman Alan Greenspan admitted to the Financial Times that there was indeed a housing bubble, and compared investor thirst for asset-backed securities to a cocaine addiction. Both Greenspan and his successor Ben Bernanke have avoided the term "bubble" when discussing the housing sector. Greenspan predicted the fall in housing prices will probably be "larger than most people expect," pegging it at a minimum "large single-digit" percentage decline that could hit double digits. Greenspan told the Wall Street Journal in an interview he previously thought the odds of a national decline in housing prices was less than 50/50, but says he is less optimistic since his book was finished, after it became clear the construction industry was unable to reduce housing starts below rapidly falling home sales. Price declines, he said, will reduce home equity, leading to more subprime mortgage defaults, and pressure on consumer spending. The probability of a recession is now "slightly more than a [previously predicted] third." He cautioned that the Fed should not cut lending rates too sharply because of the risk of an "inflationary resurgence." Greenspan said the investment vehicles that issued much asset-backed commercial paper were a "savings and loan disaster waiting to happen," and forecasts CDOs "will never get back to the levels and structures that they were, because now everybody knows you cannot price them."

Sources: Financial Times, Wall Street Journal I, II
Commentary: Checking Greenspan’s Book Against Historical Record [WSJ blog] • Greenspan's Legacy • No Mr. Greenspan, Conditions Aren't Like 1998 • Greenspan Seemingly Suffers From Acute Amnesia
Stocks/ETFs to watch: SPY, DIA, AGG, SHY, IEF, TLT, TIP

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