Greenspan: Large Losses Loom

In an op-ed article for the Wall Street Journal Wednesday, former Fed chief Alan Greenspan said August's credit crisis was "an accident waiting to happen." "Virtually overnight," Greenspan writes, "the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged." The freeze was the peak of a five-year mountain of euphoria fed by unprecedented global growth. History, he writes, has not dealt kindly with extended bouts of high risk tolerance.

Bubbles, he says, can not be diffused with monetary policy, however nimble. Rather, the 'speculative fever' must break on its own. Greenspan notes that "arbitragable assets (equities, bonds and real estate, and the financial assets engendered by their intermediation) now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion." He cautions the current credit crisis will not end until huge inventories of new homes are sold, and home-price deflation ceases. "That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business."

Commentary: Housing Prices Will Continue to Fall - Greenspan

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.

Comments

[user225084-...:]

Yeah, Greenspan is a real genious. The housing bubble proves that.

2007 Dec 12 12:24 PM

[gps_geek:]

Yes, "Bubbles" Greenspan how sees the credit crisis as an "accident
waiting to happen". Of course HE caused the crisis through years of easy money.

2007 Dec 12 12:32 PM

[Scorpio69er:]

In order to understand our present situation, it is instructive to read this article from the WSJ from June 9, 2005:

In Treating U.S. After Bubble, Fed Helped Create New Threats

* Low Rates Bolstered Economy, But Housing, Foreign Debt Appear Out of Balance

* Greenspan's Legacy at Stake

"If I were a biologist I'd call this a perfect example of symbiosis," former Fed Chairman Paul Volcker mused in a February speech at Stanford University. "Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern can't go on indefinitely."

Almost every economist agrees. The debate is over how, not whether, the global economy rebalances: Will it be smooth, through some combination of declining dollar and accelerating foreign demand? Or will it be chaotic, with a dollar collapse, much higher U.S. interest rates and perhaps a global recession?

Mr. Volcker thinks a crisis is likely. Investor confidence could fade "at some point," he said, with "damaging volatility in both exchange markets and interest rates."

www.andongkim.com/arti...

2007 Dec 12 03:03 PM

[Jimk7:]

Human psychology. Simple.

You can hire all the economists in the world and still can't measure or predict the human psyche.

When one sees change and feels change and experiences change and that change is positive for his/her environment, a state or euphoria presides over all.

2007 Dec 12 07:58 PM

[sasian:]

i love greenshpan.. especially as continues to be the prophet laureate of self-fulfilling prophecies..

2007 Dec 12 11:37 PM

[chagrinned1:]

Our best scenario in the USA is that Greenspan take up golf- 36 holes per day that wears him out, precluding speaking engagemants. The chaos was fed on his watch. He retired?? I think his new wife wants his news stories to enhance her career. Typical newsgirl!!

2007 Dec 13 03:17 PM

[Rocktex:]

He (Mr. G) cautions the current credit crisis will not end until huge inventories of new homes are sold, and home-price deflation ceases. ......... Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business."

Gee! He is really a genius and finally gives us his real words and the real medicine.

2007 Dec 13 06:16 PM