Falling Home Prices Pose Major Risk: Greenspan
Former Federal Reserve Chairman Alan Greenspan said on Tuesday that falling U.S. home prices and high inventories of unsold properties presented a major risk to the U.S. economy and financial markets.
Greenspan said he was not "sanguine" about the how quickly the glut of unsold homes could be reduced.
"We still need to accelerate the rate of inventory liquidation, and that will mean bringing housing starts down and sales up. We have a long way to go," said Greenspan, who was answering questions at a CEO conference in Tokyo via video link from Washington.
"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," he said.
The drag from the housing market's downturn and the surge in defaults among subprime mortgage borrowers has hit credit markets around the world and prompted the Federal Reserve to slash interest rates to limit the economic fallout.
Greenspan said about $900 billion of subprime mortgages have been securitised into fixed-income instruments, and the excess level of unsold homes is driving the price declines that are eroding the value of the securities backed by those mortgages.
Commodity Prices Rising
The surge in defaults in subprime mortgages has taken a toll on major financial institutions, leading to billions of dollars in asset write-downs and the departures of the chief executives of Merrill Lynch and Citigroup.
Greenspan, who retired in early 2006 after a nearly two-decade stint as Fed chief, has previously said the odds of the U.S. economy falling into recession were less than 50-50 despite ongoing troubles in the property market.
Inventories of existing U.S. homes have jumped to the highest on record going back to 1999, while inventories of new homes remain at elevated levels as falling prices and tighter credit standards have deterred buyers.
But Greenspan said the global economy was very powerful even with the "extraordinary" rise in oil prices, and the underlying structure of the global economy was doing well.
Commodity prices were likely to keep rising, he said, but that did not mean such increases would lead to an acceleration of inflation, and central banks still had the power to keep price pressures in check.
Greenspan said the dollar's slide was neither favourable nor unfavourable, but he said faster productivity in China and other emerging market economies in Asia in coming years would lead to further losses in the U.S. currency against East Asian currencies.
Yet the hefty U.S. current account deficit did not necessarily mean the dollar had to fall, he said, because the currency has already weakened, especially against European counterparts.
The dollar has slid to record lows against the euro and a basket of major currencies in the past few months, hurt in part as the Fed's rate cuts have made U.S. assets less attractive.
"What is not true is that because we have a large current account deficit, therefore the dollar must weaken," he said. "In short, the discounting of the expectation of the growth of the deficit to this level has already affected the exchange rate. To say it is going to move further as a consequence of this is double-counting."