- The Washington Times - Wednesday, October 3, 2007

LONDON (AP) — Former Federal Reserve Chairman Alan Greenspan defended the U.S. subprime mortgage market, arguing that the repackaging and sale to investors of risky home loans — not the loans themselves — are to blame for the global credit crisis.

Mr. Greenspan warned that the long-term effects on the economy are still being determined, but said there are early signs of an easing in the crisis.

“For example, the yields on what has been the poster child of this crisis, asset-backed commercial paper, have jumped up sharply,” he said. “It has since come down, but not all the way.”

Similarly, the interbank lending rate, which jumped in recent weeks because of fears about insolvencies, has started to decline, but “not all the way,” Mr. Greenspan said yesterday during a public talk in London to promote his new book.

“We are not through with this yet,” he added, suggesting there could still be what he termed an “Act II,” in which falling house prices feed into slower consumer spending.

The National Association of Realtors said yesterday that its seasonally adjusted index of pending sales for existing homes fell 6.5 percent from July and 21.5 percent from a year ago.

The pending home sales index has done a fairly good job of predicting sales levels over the following two months, said Joshua Shapiro, chief U.S. economist with MFR Inc. in New York.

Morgan Stanley, meanwhile, said it will cut 600 jobs and slim down its mortgage business as the credit crunch forces investment banks to reduce their exposure to the housing sector.

Mr. Greenspan implicitly criticized the role of ratings agencies in the crisis.

“The problem was that people took that as a triple-A because ratings agencies said so,” he said. Yet when they tried to sell the products, they ran into difficulties, which shook confidence.

“What we saw was a 180-degree swing from euphoria to fear, and what we’ve learned over the generations is that fear is a very formidable challenge,” Mr. Greenspan said.

Ratings agencies, such as Standard & Poor’s Corp., Moody’s Investors Service Inc. and Fitch Ratings, have come under fire for being slow to lower their ratings on securities based on mortgage loans to U.S. borrowers with poor credit records.

Mr. Greenspan defended the role of central banks and market regulators, claiming they lack the resources to deal with criminal and illegal acts.

“We are not skilled enough in these areas and we shouldn’t be expected to,” he said. “It should be with the states’ attorney general and, frankly, it should be beefed up a considerable amount from where it is at this stage,” he said.

He said, however, that a place in the market remains for borrowers without stellar credit.

“Subprime mortgages were and are risky, but they are worth it,” Mr. Greenspan said, adding that is better to have a larger property-owning class with a vested interest in the system.

Mr. Greenspan acknowledged that many people should not have taken out those mortgages, but that the current crisis can be attributed to “not the subprime problem itself, but to the securitization of subprime.”

Without that, there would have been significantly fewer defaults, he said.

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