GO
Loading...

Crisis Was 'Accident Waiting to Happen': Greenspan

An unusually high degree of risk taking across asset classes made recent financial market turmoil all but inevitable, former Federal Reserve Chairman Alan Greenspan said Sunday.

"The financial crisis that erupted on August 9 was an accident waiting to happen," Greenspan said in a speech on the sidelines of the International Monetary Fund and World Bank meetings. "Credit spreads across all global asset classes had become suppressed to clearly unsustainable levels."

"Something had to give," he said.

"If the crisis had not been triggered by a mispricing of securitized U.S. subprime mortgages, it would eventually have erupted in some other sector or market," Greenspan said.

Defaults on subprime loans, made to borrowers with poor credit records, have spiked in recent months, setting off a chain reaction that has tightened credit conditions around the globe. That, in turn, has raised worries about the U.S. economy that have sent the value of the U.S. dollar tumbling.

The weaker dollar is helping to rein in a large U.S. trade deficit by lending support to U.S. exporters, who are finding their goods more competitive in overseas markets.

Some economists have been concerned that a large U.S. trade shortfall could lead to a sharp and economically harmful drop in the value of the dollar.

Greenspan, who stepped down from the Fed early last year, said apprehension about the size of the shortfall in the U.S. current account, the broadest trade measure, was not

groundless. However, he said would not view the unwinding of the deficit with "undue alarm," unless protectionist trade pressures and budgetary red ink continued to grow.

"If the pernicious drift toward fiscal instability is not arrested and is compounded by a protectionist reversal of globalization, the current account adjustment could be quite painful for the United States and our trading partners," he warned.

The current account gap swelled to more than 6 percent of U.S. gross domestic product last year, leaving the United States reliant on foreign capital to finance that deficit.

"At some point, foreign investors will balk at increasing their share of dollar denominated assets in the portfolios they hold," he said, adding the recent dollar decline is an indication that America may be nearing that point.

Some economists fear the growing role of state-controlled investment funds may increase fears in the United States about the potential takeover of strategic U.S. assets.

These sovereign wealth funds are thought to have some $2.5 trillion at their disposal, with much of that under the control of trade surplus countries, such as China, Russia and the Middle East oil exporters.

Contact Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More