Greenspan's Revelation: Subprime Mortgages Are to Blame
In his opening remarks this morning before the House Oversight and Government Reform Committee, Alan Greenspan said he raised concerns back in 2005 that there would be dire consequences to the bloated housing market.
The current crisis, however, is much worse than he imagined.
"It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount," he said. "Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment. 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."
U.S. home prices must stabilize, he said, in order for recovery to begin. But that is still "many months in the future."
"Between then and now, however, to avoid severe retrenchment, banks and other financial intermediaries will need the support that only the substitution of sovereign credit for private credit can bestow," he continued. "The $700 billion Troubled Assets Relief Program is adequate to serve that need. Indeed the impact is already being felt."
He characterized his reaction to the current situation as "shocked disbelief."
As if he was saying something brand new, he said the subprime mortgage boom was the "undeniably the original source of the crisis."
Perhaps lawmakers will press him to reveal something they didn't already know.
-- Kim Hart
October 23, 2008; 10:17 AM ET
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