Keeping housing prices up solves subprime problem, Greenspan says


Subprime Spillover Is Unlikely,
Former Fed Chairman Greenspan Says

By Brian Skoloff
Associated Press
via Yahoo News
Thursday, March 15, 2007;_ylt=AsWhyHnP4...

The troubles plaguing lenders of risky mortgages are not likely to spill over into the broader economy unless housing prices see another substantial dip, former Federal Reserve chairman Alan Greenspan said Thursday.

"I think it's important to recognize that what we're dealing with ... is more an issue of house prices than it is mortgage credit," Greenspan said at a Futures Industry Association conference in Boca Raton, Fla.

Greenspan said that as home prices dipped, "subprime borrowers have not been able to build up enough equity."

If home prices drop in a year, he predicted that could cause the problems to "spill over into other areas."

"At the moment, we're not seeing this," he said. "The spillover is just not there."

Mounting concerns about risky mortgages by subprime lenders who provide loans to people with poor credit histories have been making investors jittery. Those fears prompted a sharp drop on Wall Street earlier this week and they contributed to a worldwide stock meltdown on Feb. 27, where the Dow Jones industrials suffered a 416-point plunge.

Worried about defaults on the high-risk mortgages, federal bank regulators earlier this month called on lenders to use caution in making subprime loans and strictly evaluate borrowers' ability to repay them.

However, Greenspan said that if home prices "would go up 10 percent, the subprime mortgage problem would disappear."

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson also have said they don't expect the problems of the subprime mortgage market to spread through the financial system and hurt the economy.

On another matter, Greenspan repeated a warning about the massive strain on the U.S. budget and the economy in the future from the looming retirement of 78 million baby boomers, who will draw benefits from Social Security and Medicare.

He called the pending retirements "one of the seminal events in the first part of the 21st century in the United States."

Greenspan said that as medical technologies advance, costs for services and medicine will also change.

"There is a significant probability that under existing law, that we have overpromised what will be available to Medicare recipients," he said.

Greenspan largely shied from talking about the economy's immediate future after comments he made two weeks ago that a recession was possible at the end of this year contributed to the plunge in the Dow Jones industrial average.

Asked about short-term interest rates, Greenspan replied: "Since I left the Fed, the one question I haven't been answering is that one."

"I can only get myself into deep grief," he said.

He was even hesitant to address one question from an audience member about how it makes him feel that his words make world markets "quiver."

"I'm the last person to answer that question," he quipped. "I know my wife doesn't quiver."

The audience erupted in laughter, and Greenspan quickly moved onto the next question.

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