Alan Greenspan, former Chairman of the Board of Governors of the Federal Reserve criticized the government’s response to the issues that arose from the mortgage giants, Fannie Mae and Freddie Mac’s recent troubles. While he often supports his opinions with a laundry list of clauses, side notes and various comments, he simply referred to this response as, “bad.”
This week, he also stated his belief that the United States house prices will be stable, or at least stabilizing during the first 2 quarters of 2009. “Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009,” Greenspan said. He then added that, even when the bottom is hit, “prices could continue to drift lower through 2009 and beyond.”
Mr. Greenspan has long been considered an expert on housing markets, and it is known that he currently has an office at his home that is covered with the latest print outs of charts of housing stats from government and trade association reports. With current information on hand he held the belief that the stabilization of the market will not just help Americans but will be a “necessary condition for an end to the current financial crisis.”
“Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world’s mortgage-backed securities,” he said. “We won’t really know the market value of the asset side of the banking system’s balance sheet – and hence banks’ capital – until then,” he said.
Some have criticized Mr. Greenspan for being part of the problem however. They believe that by his keeping the interest rates low, it encouraged risky loans that have been part of the problem. He also has been off he mark on this issue in recent years. In 2006 he stated, “I think the worst of this may well be over.” Since he made these comments, housing prices have fallen an additional 19%.
Nonetheless, Alan Greenspan believes in allowing the market to correct itself, stating that government interference such as taxes or policies to increase construction will simply delay the beginning of the market’s correction process.