By Amy Glass
Former Fed chairman expressed concerns in 2004, but claims demand too strong.
Former US Federal Reserve chairman Alan Greenspan refused responsibility for the US subprime mortgage crisis on Monday, saying he tried to warn the investment market of the risks posed by the mortgage products.
Speaking at a conference in Abu Dhabi, Greenspan said he met with investment bankers who were buying the products as early as 2004, and expressed his concerns, but the market demand for the subprime mortgage products and other derivatives was too strong.
“For people who say we and the rest of the Central Bank should have raised flags, I say we did,” he said.
The resulting subprime mortgage crisis and housing oversupply has sent the US economy to the brink of recession, which could be deeper than its two succeeding slowdowns, he said.
However, he said the world’s emerging markets will support the global economy despite the weakening economy, since one third of US corporate earning are currently sourced from abroad.
Greenspan also addressed recent negative responses from the US to the issue of sovereign wealth funds (SWFs) investing there, and accused those opposed to the funds of “hidden protectionism”.
“I think that is extraordinarily counter-productive because the US has gained as much, if not more from globalisation in the post war period and we have always been a major force pushing [for it]. This makes me sad because it is not in the best interest of the US.”
Three major US based investment banks, including Citigroup, turned to sovereign wealth funds for massive cash injections in 2007.
The European Commission said on Monday it is asking for a global code requiring more disclosure from sovereign wealth funds, over fears foreign governments are using their investments for political purposes.
Greenspan’s comments in Abu Dhabi follow his speech in Saudi Arabia earlier on Monday, where he said near-record Gulf Arab inflation would fall significantly if the Gulf dropped their dollar peg.
"In the short term, free floating... will not fully dissipate inflationary pressure, although it would significantly do so. Gulf governments should consider the implication of [floating their currencies] in the long term.”
I think this is a reflection of age on the persona of Mr. Greenspan. He is increasingly becoming inconsistent with his policy oriented remarks. As the Chairman of the Federal Reserve, he had lost sight of everything else apart from the frenetic pace of American economic growth. He continued to wreck the markets with series of interest rate hikes with a plea to cooling down an overheated economy, now resulting in an unprecedented cooling (better termed cold storage). After all this he has the audacity to claim that bankers were forewarned. Mr. Greenspan more than providing a warning you could have prevented the precipitation of this crisis. You just needed to earmark a greater risk weighting to underlying mortgage assets thereby discouraging the bankers from lending unthinkingly. Instead you hiked interest rates ensuring the system along with the mortagage buyers plunged into the present state of misery. It would be more courageous and gentlemanly on your part to own up to your responsibility, rather than trying to pass it on.