- The Washington Times - Thursday, October 23, 2008

WASHINGTON (AP) - Former Federal Reserve Chairman Alan Greenspan says the current financial crisis is a "once-in-a-century credit tsunami" which will have a severe impact on the U.S. economy, driving unemployment higher.

Greenspan, who headed the nation’s central bank for 18 1/2 years, says in testimony prepared for Congress that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief."

In testimony he was giving to the House Oversight Committee, Greenspan blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.”

Greenspan said that a necessary condition for the crisis to end will be a stabilization in home prices but he said that was not likely to occur for "many months in the future."



When home prices finally stabilize, Greenspan said, then "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk."

Greenspan said until that occurs, the government is correct to move forward aggressively with efforts to support the financial sector. He called the $700 billion rescue package passed by Congress on Oct. 10 "adequate to serve the need" and said that its impact was already being felt in markets.

In his written testimony, Greenspan did not specifically address the criticism he is receiving now as being partly to blame for the current crisis.

Greenspan’s critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed’s powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.

In his testimony, Greenspan put the blame for the subprime collapse on over-eager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward

"It was the failure to properly price such risky assets that precipitated the crisis," Greenspan said.

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