tinyurl.com/6l3kpr -> blogs.wsj.com/economics/2008/08/13/greenspan-excerpts-housing-stabilization-key-to-crisis-end/
interview with former Federal Reserve Chairman Alan Greenspan conducted by David Wessel, The Wall Street Journals economics editor. BOTTOM LINE: Greenspan Greenspan (Getty Images) Home prices in the US are likely to start to stabilize, or touch bottom, sometime in the first half of 2009, though prices could continue to drift lower through 2009 and beyond. WHY IT MATTERS A necessary condition for an end to the current global financial crisis is the stabilization of the price of homes in the US Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial worlds mortgage-backed securities. We wont really know the market value of the asset side of the banking systems balance sheet -- and hence banks capital -- until then. IMMIGRATION Public policy can hasten this process by not prematurely propping up housing starts and by expanding the underlying demand for homes generally. The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants. Skilled immigrants tend to form new households, by far the most important source of new home demand. The number of new households in the US is increasing at a rate of about 800,000 a year, of which about a third are immigrants. Perhaps 150,000 of those are loosely classified as skilled. A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices. Its costly to the holder of the mortgage and disaster for the homeowner. In the days before we sliced and diced mortgages into securities, when the borrower got into trouble, hed come to the assistant vice president of the local S&L and get agreement to stretch out the payments or restructure the loans in a deal that worked for both parties Until the recent surge in foreclosures, more than half of all loans that went into foreclosure were cured without the sale of the property. SUPPLY GLUT US home prices will stabilize only as the current huge 800,000 excess of vacant single-family homes for sale is dramatically reduced and prices deflate to the level consistent with the historical rate of return on owning a home that prevailed before the price surge in the US and elsewhere. One is the supply of vacant single-family homes for sale, both newly completed new homes and existing homes owned by investors and lenders. New single-family home completions are currently just barely under the rate of home demand generated by household formation and replacement needs. Only early next year will the current suppressed level of housing starts be reflected in completion levels consistent with a sufficiently rapid rate of liquidation to materially reduce the bloated inventory excess. We seem to be approaching a peak in the number of new foreclosures, though the number in foreclosure will continue to rise for awhile. The other pillar is a comparison of the current price of houses -- he prefers the S&P/Case-Shiller National Home Price Index -- with the governments estimate of what it costs to rent a single-family house. Its the imbalance of supply and demand which causes prices to go down, but its ultimately the valuation process of the use of the commoditywhich tells you where the bottom is. For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. Itll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level. FANNIE MAE & FREDDIE MAC The issue is how you get a viable mortgage market when this is all over. What is your opinion of the recently legislated solution? This was the ideal opportunity to come to grips with what is a fundamentally flawed model, which privatizes profits and socializes losses, which is fiscally tolerable in small amounts but in trillions of dollars, it isnt They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted with necessary taxpayer support to make them financially viable as five or 10 individual privately held units, and auctioned off. The affordable housing programs should be put into GNMA; By the time we have the next mortgage crisis, the five or 10 individual companies would have diversified into other areas of finance, and maybe one or two of them would fail. But having been significantly downsized, systemic risk would be avoided. Why the government had to back Fannie and Freddie debt: When Bear Stearns was bailed out, it was inevitable. Theres no credible argument for bailing out Bear Stearns and not the GSEs. On the argument that markets would react adversely if US government took the Fannie and Freddies debt onto its books: Untrue. The law that stipulates that GSEs are not backed by the full faith and credit of the US government is disbelieved. The only fiscal change is for someone to change the bookkeeping.
Home builders, tradesmen financiers & employee 401 plans have grown accustomed to easy credit & big profits. Our best bet is to follow the 1990's Resolution Trust Corporation example by selling off thousands of distressed properties, so that we may then get back to the business of launching economic recovery. Japan's economic malaise awaits us if we lack the courage to make the tough political decisions.
Now I want to ask you where you were while the problems you speak of were festering. Wasn't it under your watch that the seeds of today's problems were sewn? the current system is broken, but again, I ask you why you didn't raise these questions while you were in charge. Today, after the legislation has been signed, it's a bit late to make these criticisms. While Im at it, let me also suggest that an action on the Fed's part could have cooled the tech bubble before it got out of hand; you could have headed off the tech bubble by raising the Margin Requirements.
It looks banks are gambling with the borrowed money by investing in non poductive assets such as stocks, commodities and real estates. The question arises do bankers deserve to get paid in millions?
Never a straight line, always up-and-down, never straight. So, i'm not sure we can make anyone guilty on these topics. "Freedom" is the word i have a problem with, when people say "He/WE should have done this/that, people forget that when "THEY" do this or that, others cry "freedom LOST". So, how much control and when and where do we put controls?
He proposes that legislation should have "wiped out" shareholders of two companies that were and continue to be adequately capitalized based on the legal definition. This contradicts the argument stated in his book about the importance of property rights to a well functioning economic system. The reality is that his constant attacks on the GSEs have played a greater part in the current investor panic more so than any actual systemic risk. If you want to find systemic risk, Mr Greenspan, you should look at the Investment Banks.
Greenspan has the answer: Bring in more immigrants to perpetuate the greater fool theory. To think that just because you are a skilled immigrant you will find a $1,000,000 bungalow with bars on the windows a great deal is laughable. Skilled workers of any nationality will tend to form households when it is financially feasible.
This does not absolve him of responsiblity for creating this mess in the first place. Where were the regulators when Wall Street perpetuated this scam? Why did he keep rates irresponsibly low for way too long? You can never get a straight answer from liars and politicians.
a fundamentally flawed model, which privatizes profits and socializes losses, which is fiscally tolerable in small amounts but in trillions of dollars, it isnt."
But the Fed policy of easy money helped create that overseas savings glut in the first place by triggering a massive US buying spree from abroad. So he can hardly claim that the Fed under his leaders...
|
http://csua.com/feed/