Reuters
Thursday 15 March 2007
Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.
In a wide-ranging question-and-answer session at the Futures Industry Association meeting, Greenspan conceded it was "hard to find any such evidence" about spillover from stressed mortgages yet, but: "You can't take 10 percent out of mortgage originations without some impact."
"I'd expect it to - I'm waiting - but the spillovers are just not there," he said. Some problems have turned up in collateralized debt markets, Greenspan added.
Greenspan said the housing downturn appeared to stem more from the recent stagnation in housing prices after years of appreciation than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.
Subprime woes were "not a small issue," said the 81-year-old policy kingpin emeritus.
The current problems seemed to result primarily from buyers who had come into lofty housing markets late in the game, Greenspan said, only after huge price run-ups that made homes less affordable.
Default rates in the subprime segment of the U.S. mortgage market have jumped in recent months as the housing industry slowed and prices fell.
At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business as a result.
The crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.
Greenspan, whose words still move markets even though he vacated the Fed chairmanship more than a year ago, said much of the strength in consumer spending over the past five years could be traced to capital gains, both realized and unrealized, on surging housing prices.
If home prices keep falling, there could be more of an impact on the broader economy's momentum, he indicated. Consumer spending fuels two-thirds of national economic activity.
Greenspan declined to comment specifically on the Fed's current monetary policy or the likely direction of interest rates.
On other issues, Greenspan unleashed a broadside at what he termed "archaic" procedures for settling trades in the huge over-the-counter credit derivatives market.
"I was shocked to find the credit derivatives market, which was working superbly, ends up with the settlement and clearing done with 19th century technology," Greenspan told the futures conference.
"There's an insanity out there that I don't understand," he added. He called on the New York Federal Reserve Bank, which plays a crucial role in the U.S. central bank's financial settlements procedure, to stay involved or "we would face a really dangerous problem."
Greenspan also warned the pending retirement of the baby boom generation would be a "seminal event" for the U.S. economy as costs of entitlement programs rise.
Successive administrations had over-promised benefits to the point where the United States faces a "serious ethical problem," Greenspan said.
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Additional reporting by Glenn Somerville in Washington
Housing Mess Risks Recession Unless Fed Cuts: Merrill
Reuters
Thursday 15 March 2007
House prices could tumble 10 percent this year and raise the chances the United States may slip into recession unless the Federal Reserve cuts interest rates to cushion the fall in economic growth, Merrill Lynch said in research notes this week.
If correct, the prospects of this scenario will prove troubling for equities investors, who could face a stock market decline of 30 percent or more as measured by the S&P 500 index <.SPX>, the brokerage said.
Merrill said the biggest concern is that tighter lending standards in the mortgage market, even if confined to lower-quality borrowers, will constrain overall housing demand and hamper recovery in the struggling housing market.
"It is not inconceivable (given what is happening now to mortgage originations) that we end up with something closer to a 10 percent decline in home prices this year," Merrill Lynch said.
Merrill said this alone would slow the economic expansion to a rate of about 1.5 percent to 1.75 percent this year, which it termed a "growth recession."
The traditional definition of a recession is two consecutive quarters of declining gross domestic product.
However, if the inflation-fighting Federal Reserve were to keep rates unchanged to contain price growth - instead of cutting by 1 percentage point in the second half of 2007 as Merrill expects - then this would put the probability of an outright recession in the second half at "very close to 100 percent."
In the past, moves by financial markets to price in some risk of a recession, without a recession actually occurring, have led to an average drop in the S&P 500 of 16 percent in sell-offs lasting 13 weeks.
"But if we do end up seeing a recession, then it's game over: the historical record shows that the average decline in the S&P 500 is 34 percent and the average duration is 37 weeks - more than double the magnitude and triple the duration of classic non-recessionary correction," Merrill added.
The Merrill notes reflect the debate in financial markets in recent days, which has centered on whether the crisis in the subprime mortgage market can be contained.
Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.
Greenspan said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.
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