Former Fed Chief: Economy Safe From Mortgage Woes
Troubles plaguing bad credit home loan lenders are not likely to spill over into the broader economy unless home prices see another substantial dip, former Federal Reserve chairman Alan Greenspan said Thursday.
“I think it’s important to recognize that what we’re dealing with… is more an issue of home prices than mortgage credit,” Greenspan said at a Futures Industry Association conference in Boca Raton.
Greenspan said that as home prices dipped, “subprime borrowers have not been able to build up enough equity.”
Mounting concerns about risky mortgages by lenders who provide loans to people with poor credit history have been making investors jittery.
Those bad credit mortgage fears prompted a very sharp drop on Wall Street earlier this week and they contributed to a worldwide stock meltdown on February 27, where the Dow Jones industrials suffered a 416-point plunge.
Worried about defaults on the high-risk mortgages, federal bank regulators earlier this month called on lenders to use caution in making subprime (bad credit home loans) and strictly evaluate borrowers’ ability to repay them.
However, Greenspan said that if home prices “would go up 10 percent, the subprime lending problem would disappear.”
If home prices drop in a year, he predicted that could cause the problems to “spill over into other areas.”
“At the moment, we’re not seeing this,” he said. “The spillover is just not there.”
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson also have said they don’t expect the problems of the home mortgage market to spread through the financial system and hurt the economy.
On another matter, Greenspan repeated a warning about the massive strain on the U.S. budget and the future economy from the retirement of 78 million baby boomers, who will draw benefits from Social Security and Medicare.
He called the pending retirements “one of the seminal events in the first part of the 21st century in the United States.”
Greenspan said that as medical technologies advance, costs for services and medicine will also change.
“There is a significant probability that under existing law, that we have overpromised what will be available to Medicare recipients,” he said.
Greenspan largely shied from talking about the economy’s immediate future after comments he made two weeks ago that a recession was possible at the end of this year contributed to the Dow Jones plunge.
Asked about short-term mortgage rates, Greenspan replied, “Since I left the Fed, the one question I haven’t been answering is that one. I can only get myself into deep grief.”
He was even hesitant to address one question from an audience member about how it makes him feel that his words make world markets “quiver.”
“I’m the last person to answer that question,” he quipped. “I know my wife doesn’t quiver.”
SOURCE: Bradenton Herald