Greenspan Says Federal Reserve Lost Control Around 2002
After the close Former Federal Reserve Chairman Alan Greenspan was interviewed on CNBC by Maria Bartiromo and said he thinks globalization drove the housing bubble not his lax interest rate policies. Sir Greenspan, who was knighted in 2002, cited statistical studies that show a low correlation between housing prices and the growth rate in the use of Adjustable Rate Mortgages, or ARMs. The former Fed Head is on record in a speech in 2004 to the Credit Union National Association promoting the use of ARMs while espousing the virtues of securitization of debt, dubious comments in light of their role in the current credit crisis.
Greenspan went on to say that the Federal Reserve’s dovish monetary policy stance, that dropped interest rates to generation lows, fueling so much of the lax lending standards, was in response to the perception of a greater than fifty-fifty chance of price deflation by the Federal Reserve at that time.
Lost Control
A interesting point in the interview occurred when Greenspan admitted that the Federal Reserve lost control of the long end of the bond market “around 2002, 2003″. He explained that at that time “global forces” began to dominate the market for long term yields. To support his argument, Greenspan points to the 100 Trillion Dollars in outstanding arbitrage-able long term assets in the marketplace today presumably as the overriding market force.
Health of the Financial System
When asked about the current economic environment, Greenspan said we are “in the throws of recession”. He said the outcome of the economy will be determined by the struggle between what is happening in the financial sector and the broader economy.
On the health of the financial system Greenspan said this is the first time that he can recall both the banking and securities markets in trouble. He speculated that the end result of the current global financial crisis will be a demand by the market for more capital and less leverage.
Greenspan reiterated his belief that the economy can only recover when housing prices reach a bottom. He refrained from putting a specific time frame on a housing bottom.
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