Greenspan: subprime "accident
waiting to happen"
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.
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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."