Greenspan qualifies housing market as bubble

Former Fed chairman Alan Greenspan warned that the credit cycle has turned, qualifying the US housing market as bubble. In addition, by suggesting that the relationship between growth and inflation has changed he provided the most powerful

argument that investors will have to reduce leverage. The combination of low inflation and high economic growth rates supported the housing market boom in the past, but this support will be withdrawn.

Greenspan is promoting his memoir, aptly titled The Age of Turbulence as the US Federal Reserve ponders various measures, including a reduction in interest rates to ease the credit crunch.

Greenspan argues that the Fed mainly has influence over short-term interest rates, which affect adjustable-rate mortgages, a small portion of the overall mortgage market. Long-term interest rates, which influence fixed mortgage pricing, are somewhat beyond the Fed’s control and became more so earlier this decade.

“We tried to push them up in 2004, and we failed,” he says. “What we found was that the global forces of disinflation were far too powerful for even the Federal Reserve. We tried again in 2005, and we failed.”

Greenspan notes that if the housing bubble was the Federal Reserve’s fault, why were similar such bubbles — many of them worse than what was seen in the USA — created around the globe?

Greenspan argues that the growth of the subprime mortgage market has helped expand homeownership in the USA, a worthy endeavor despite the downside that has been seen in recent months as people who were less creditworthy have struggled to make escalating payments on adjustable-rate mortgages.