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Ex-Fed Chief Concedes Mistakes in Forecasting

[Sep 29, 2007.]

 

The one-time head of the Federal Reserve admits that he didn't see the subprime crisis coming.

Former Federal Reserve Chairman Alan Greenspan says he was unaware of the potential economic threat posed by mortgages issued to individuals with troubled credit histories.

With subprime mortgages, homeowners received a low introductory rate, but then saw the rate skyrocket, resulting in house payments that strained their household budgets. Greenspan maintains that he knew about the practice, but had no idea what kind of damage they could cause.

Greenspan reportedly told the news magazine program "60 Minutes" that he did not grasp the significance of the situation until late 2005 and 2006. As a result of the subprime crisis, a number of lenders have been forced out of the mortgage business. Delinquencies and foreclosures have also risen dramatically as a result of the situation.

In many cases, lenders have tightened standards, making it more difficult for consumers to obtain home loans. That, coupled with an overall slowdown in the house-selling market, has led to fears that the economy will be catapulted into a recession.

Greenspan was head of the Federal Reserve for nearly two-decades, making him the second-longest serving chief in Fed history. He left the post in 2006 and, as a result, the man who followed him in the hot seat, Ben Bernanke, has had to deal with the fallout from the subprime fiasco.

In the early part of the decade, house sales reached a record high - and home prices soared as well. However, those glory days are long gone, and analysts do not expect the housing market to recover until sometime in 2008. For many homeowners already behind on their mortgage payments, that will be too late to save their homes from foreclosure.

Observers predict that the Fed will cut a key interest rate next week as a hedge against recession

Julie Ann Amos
September 29th 2007

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