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Account Management
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Greenspan: subprime "accident waiting to happen"

Reuters
Wednesday December 12, 2007

The U.S. subprime mortgage crisis was an "accident waiting to happen" as a period of unprecedented global growth seduced investors into underpricing risk, former Federal Reserve Chairman Alan Greenspan argued in an article published by The Wall Street Journal on Wednesday.

While acknowledging the low U.S. interest rates set under his leadership may have contributed to the bubble in U.S. home prices, Greenspan said he felt the roots of the subprime mortgage crisis actually lie with global economic expansion.

"The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when...market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World," Greenspan wrote.

(Article continues below)

The growth of fairly educated low-cost workers, and exports from developing countries flattened wages in developed countries and reduced inflation expectations globally, including inflation expectations embedded in global long-term interest rates, Greenspan said.

"In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities," Greenspan wrote in the Journal. "Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates."

Full article here.

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