Ex-Fed Chief Terms Crisis As “Accident Waiting To Happen”

Former Federal Reserve Chairman Alan Greenspan blamed the unusually high degree of risk-taking across asset classes for the recent financial market turmoil. He maintained that such turmoil was “all but inevitable.”

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

Greenspan was of the opinion that if the crisis had not been prompted by a mispricing of securitized U.S. subprime mortgages, it would eventually have exploded in some other sector or market.

Defending his decision to cut U.S. benchmark interest rates to 1 percent in 2003 and holding them there for a prolonged stretch, he said, “Central banks have lost control of the markets maybe three or four or five years out. The Fed raised short-term rates in 2004, but mortgage rates didn't respond. In other words, there is no evidence that we at the Fed had the capability of affecting mortgage interest rates.”

In recent months, defaults on subprime loans have spiked. These loans had been given to borrowers with poor credit records. All this has set off a chain reaction that has tightened credit conditions around the globe. Greenspan made no bones in stating that the subprime market has failed.

Greenspan said that the apprehensions surrounding the shortfall in the U.S. current account, were not groundless. "If the pernicious drift toward fiscal instability is not arrested and is compounded by a protectionist reversal of globalization, the current account adjustment process could be quite painful for the United States and our trading partners." he warned.

In recent times, the U.S. current account gap has bulged to more than 6 percent of gross domestic product. This has led to United States being profoundly dependent on foreign capital to finance that deficit.

Greenspan said that the level of debt is important. Whether it's owed to foreigners or fellow countrymen is not important. Hitting the nail on the head, he said, It's the level of debt, not the source of its financing, that should engage us."