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Paul Kiesel
Paul Kiesel
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Former Fed Chief Greenspan Changes Economic Outlook: Housing Nowhere Near the Bottom

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According to CNBC.com, former Federal Reserve Chairman Alan Greenspan said the US is “nowhere near the bottom” of the housing slump and is “right on the brink” of a recession.

These remarks greatly contrast what Mr. Greenspan said, in 2006, as the housing bubble peaked and prices were on a slight declivity, “I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out [. . .] There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over,” (MSNBC.com, 10/9/06).

Maybe Mr. Greenspan really didn’t know how the following 18 months would play out, but it’s hard to believe someone as astute and erudite as he is in economics would not have been able to foresee the foreclosure crisis we’re currently in. Many other economists feared our current economic state before it even commenced (Robert Schiller being one of them).

Mr. Greenspan also stated that a recession is almost inevitable and that, “I think we’re right on the brink [. . .] I’d be more surprised if we didn’t than if we did, given the financial state.”

Mr. Greenspan agreed with the government’s intervention of Bear Stearns and Fannie Mae & Freddie Mac, stating that they had “no choice” but to bail the three companies out. However, he was also quick to point out that Fannie and Freddie are a major accident waiting to happen.

The solution to Fannie’s and Freddie’s difficulties: Mr Greenspan said, “I think the ultimate solution is a nationalization of both Fannie and Freddie and I hope a restructuring in that nationalization [. . .] And then split them up into five or ten separate entities and sell them back into the market.” (An interesting note: After Greenspan said this both stocks were pushed lower.)

Mr. Greenspan has been blamed, along with other Bush Administration officials, for allowing lax lending/credit standards, which allowed for the subprime boom to penetrate the housing and credit markets, setting up the current financial crisis. The economic predictions he discussed today might turn out to be true, but it’s unfortunate that when he was the Fed Chairman and even shortly after he retired, he chose to ignore the writing that was on the wall (Center for Responsible Lending issued a warning in 2006) and enabled the whole mortgage meltdown to spin out of control. Where was this advice/foresight 18 months ago?