Greenspan Excerpts: Housing Stabilization Key to Crisis End

Greenspan Excerpts: Housing Stabilization Key to Crisis End
The following are excerpts from an interview with former Federal Reserve Chairman Alan Greenspan conducted by David Wessel, The Wall Street Journal’s economics editor.
BOTTOM LINE:
Greenspan (Getty Images)
“Home prices in the U.S. 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 U.S. 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. 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.”
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 U.S. 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.”
FORECLOSURE AVOIDANCE
“It’s a good idea. Foreclosures don’t help anybody. It’s 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, he’d 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
“U.S. 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 U.S. and elsewhere.”
Mr. Greenspan’s forecast rests on two pillars of data. 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 government’s estimate of what it costs to rent a single-family house.
“It’s the imbalance of supply and demand which causes prices to go down, but it’s ultimately the valuation process of the use of the commodity…which 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. It’ll 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 happens in 2010 or 2011?”
What is your opinion of the recently legislated solution? “Bad.”
“It does not alter the flawed model. A new regulator does not have that capability.”
“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 isn’t”
“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; or another government agency. 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. There’s no credible argument for bailing out Bear Stearns and not the GSEs.”
On the argument that markets would react adversely if U.S. government took the Fannie and Freddie’s debt onto its books: “Untrue. The law that stipulates that GSEs are not backed by the full faith and credit of the U.S. government is disbelieved. The market believes the government guarantee is there. Foreigners believe the guarantee is there. The only fiscal change is for someone to change the bookkeeping.”
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Yahoo! Buzz Share on Facebook Del.icio.us The following are excerpts from an interview with former Federal Reserve Chairman Alan Greenspan conducted by David Wessel, The Wall Street Journal’s economics editor.
BOTTOM LINE:
Greenspan (Getty Images)
“Home prices in the U.S. are likely to start to stabilize, or touch bottom, sometime in the first half of 2009, though prices could continue to drift lower […]
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He’s right about this one.
Comment by Mark Hanna - August 13, 2008 at 5:47 pm
He is trying to grab the attention all the time. Why not say the above as Fed Chairman? You never know whether he is speaking on behalf of John Paulson now.
Comment by Howard - August 13, 2008 at 5:56 pm
Why didnt he mentioned that it was….HIM THAT CREATED THIS NIGHTMARE….IN THE FIRST PLACE…..
Comment by ANONYMOUS. - August 13, 2008 at 5:57 pm
“Creative destruction” needed to find the bottom of the housing bust may be too harsh a tonic for some American voters & consumers.
Home builders, tradesmen financiers & employee 401(k) 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.
Comment by Mark Fredrickson - August 13, 2008 at 6:00 pm
Mr. Greenspan, Thank you for your service to the nation. 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? Many of the points you make are valid; 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. Thanks.
Comment by Jim Ogburn - August 13, 2008 at 6:07 pm
Banks are borrowing at 2% and lending it at 6% and still can’t turn a profit, which means something is wrong. It looks banks are gambling with the borrowed money by investing in non poductive assets such as stocks, commodities and real estates. As stocks are down so does banks profitability. Lessons are not learnt. The question arises do bankers deserve to get paid in millions?
Comment by Anonymous - August 13, 2008 at 6:18 pm
One question for “to make them financially viable as five or 10 individual privately held units, and auctioned off”, What would happen if they M & A each others and back to the old form?
Comment by zweitu - August 13, 2008 at 6:19 pm
Well now, not so fast, although you’ll might be corecto.
Never a straight line, always up-and-down, never straight. So, i’m not sure we can make anyone guilty on these topics. But maybe you can…?“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? Without freedom being lost.
Comment by skate - August 13, 2008 at 6:27 pm
The irresponsibility of the government to overspend that Mr. Greenspan sponsored for years was transferred to the people. Living beyong the means is the recipe for financial disasters.
Comment by Gabriel - August 13, 2008 at 6:29 pm
I am a fan of Mr. Greenspan, however I strongly disagree with his opinions regarding the GSEs.
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.
Comment by Jason Norbeck - August 13, 2008 at 6:34 pm
1) This guy wanted people to get adjustable mortgages. Anyone take him up on that?
2) He did warn re the growth of the GSEs–give him that much.
3)We have now made “bailout” a natural outcome, a floor. Success get’s the living daylights taxed out of it–if you are a loser, Uncle Sappy will provide.
4) Now that we have said “yes” to the GSEs, Investment Banks, backstopping the FDIC to the tune of $70 Billion for the coming 300 bank failures, the student loan agencies, and people that should have never been homeowners (and their lenders), what about the airlines, autos, credit card portfolios, HELOCS, auction rate securities and auto suppliers?
5) How many bubbles are we now creating?
Comment by Zippy in Annapolis - August 13, 2008 at 6:35 pm
This clown is responsible for the housing bubble, yet he still has the nerve to show his ugly face.
Comment by Freddie Big Mac - August 13, 2008 at 6:41 pm
I’m not sure what ‘data’ this clown is using, but all valaution metrics still show real estate is overvalued by 30%-40% !
Comment by Anonymous - August 13, 2008 at 6:42 pm
I predict that Real Estate…WILL continue “FALLING”…For at least another…2 Years…In the meantime…THE “TURMOIL”…Will continue, It is called…”CORRECTION”…And it is Badly needed!!!!.
Comment by ANONYMOUS. - August 13, 2008 at 6:58 pm
If we are doing 3% GDP, then we do not need any economic recovery, or do we?
Comment by skate - August 13, 2008 at 7:04 pm
Weren’t the GSE accounting scandals during Greenspan’s tenure also a good time to fix Fannie and Freddie?
Comment by What's Good for the Goose is ... - August 13, 2008 at 7:27 pm
I used to admired Greenspan,now…well, he really sucks!
Comment by gw push - August 13, 2008 at 7:36 pm
too bad that he will not be reading our comments.Bernanke is just another clown.What a shame!
Comment by gw push - August 13, 2008 at 7:37 pm
“Skilled immigrants tend to form new households.”
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.
Comment by jdj - August 13, 2008 at 8:11 pm
Hey Dont blame ME. Mr.Bubble…{ALAN} Started this Night-mare with his policy of..CHEAP,CHEAP MONEY…I Inherited this “DEBACLE”…I know that the ship is sinking fast….But remember…I ONLY WORK HERE….What do you WANT an MIRACLE??????
Comment by BEN BERNANKE. - August 13, 2008 at 8:18 pm
Mr Greenspan, I wrote and performed “Spirit in the Sky” Yet you keep trying to take credit for it !! Folks : My name’s Greenbaum - not Greenspan - please get that straight !
Comment by Norman Greenbaum - August 13, 2008 at 8:20 pm
Amazing that I actually agree with this guy on one point: If the government has to give one cent to the GSEs they need to be nationalized and liquidated.
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?
Even now he is dissembling by saying that prices will bottom next year….though they may continue to drift lower past 2009. So what’s it going to be? Will they bottom or drift lower? You can never get a straight answer from liars and politicians. IMO, he is both.
Comment by Kodiak - August 13, 2008 at 8:22 pm
Most of the posts demonstrate the lack of judgment of the booboisie. Folks, please reread the man’s comments, especially “…a fundamentally flawed model, which privatizes profits and socializes losses, which is fiscally tolerable in small amounts but in trillions of dollars, it isn’t.”
Comment by Antrobus - August 13, 2008 at 8:26 pm
In his desperate efforts of late to defend himself, Greenspan blames the housing bubble on a global savings glut that pushed down interest rates. 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 leadership had no role in creating the conditions for the housing bubble. True, once the world was awash in money, the Fed’s efforts to raise rates had much less leverage than usual at home. But the Fed had essentially shot itself in the foot by creating those conditions of excess global liquidity in the first place.
Comment by John - August 13, 2008 at 8:30 pm
Forget about housing and the GSEs, is the Fed bankrupt or at least technically insolvent? Capital is about $40 billion and assets are about $900 billion, I think? That is 22.5 to 1 leverage, not bad but how much of their portfolio is CDO type collateral? $29 billion of assets are from Bear which may only be worth 10 cents on the dollar (if Merrill is any indicator) and god only knows what the collateral is worth from their open market type functions.
http://www.federalreserve.gov/releases/h41/Current/
Comment by Kafka - August 13, 2008 at 8:45 pm
Someone should tell this bum to shut up.
Comment by Good Luck - August 13, 2008 at 9:12 pm
I “TOLD” Helicopter BERNANKE….To ALSO KEEP THE RATES “LOW”…Until the “BANKS” Get out of this “MESS”….The only problem is….We are “Destroying” the Entire U.S.A. Economy…..So What.
Comment by ALAN GREENSPAN, Mr.BUBBLE. - August 13, 2008 at 9:35 pm
I often consider Mr. Greenspan a fellow asymmetrical libertarian, in that “head I win, tail the government lose” philosophy we both embrace. His latest view on GSEs seems to be a departure from that.
Seriously, can we still call ourselves a democracy when government owns 60% of all outstanding mortgages? Should all the GSE shareholders and executives continue to make the big money while they’re still on US Treasury’s life line?
Comment by Asymmetrical Libertarian - August 13, 2008 at 9:37 pm
Congrats to Governor Paterson of New York!!! Last week you signed into law a bill that attaches unmeasurable liability to investors in subprime loans originated in NY. In response, Freddie Mac announced this week that it will not longer purchase subprime loans originated in the state after the law becomes effective. Bravo Gov Paterson! I guess you didn’t SEE or HEAR that one coming. In your rush to bailout homeowners you failed to consider the potential unintended consequences of this law, namely that you might cut off the second largest spigot of mortgage credit in the us. worse, if freddie isn’t buying no one is buying. if theres no demand for these loans, they won’t be originated.
Comment by Governor Paterson - NY - August 13, 2008 at 9:42 pm
What will happen after the collapse is the question? We’re going to go through a period of torment and tribulation. There will be more starvation, anarchy and armed conflicts around the globe. This is the last phase of a global capitalist based on gambling principles. This is not a depression were facing, it is a global reset - money destruction, suffering and war. How could we survive what’s coming is the second question? I’m of the opinion that when the global economy collapses, countries will issue inorganic currencies to operate internally. We’re going to pay dearly having had shipped critical industries offshore; we’re no longer selfsufficient - that’s a national security threat.
Comment by PUPPET MASTERS - August 13, 2008 at 10:34 pm
Prepare yourself mentally, be strong, don’t give up, keep the hope, believe in a higher being, believe in yourself, we’re survivors. We (I mean we as a nation) can and will pull out of this mess victorious after everything is said and done, even if it takes years. Just get ready for a really rough ride of biblical proportions; don’t be surprised when it comes. If you anticipate this imminent event, it won’t hit you as hard.
Good luck and good night.
Comment by PUPPET MASTERS - August 13, 2008 at 11:09 pm
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