Tags: alan greenspan | economic crisis | federal reserve | housing bubble

Greenspan: It Was Impossible to Forecast Housing Bubble's Impact

By    |   Friday, 27 December 2013 10:58 AM

Former Federal Reserve Chairman Alan Greenspan, who presided over much of the housing bubble before leaving office Jan. 31, 2006, says it was impossible to predict the destructive outcome of that bubble.

"It's a question of what's causing these various crises," he told MSNBC's "Morning Joe" program. "The basic problem is we can't forecast beyond the immediate horizon. Everyone wants us to. But no one in the real world can do that."

In looking back at the financial crisis, Greenspan said he has asked himself "is there anything that would have told me things were about to crack?"

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The answer: "I would say no," Greenspan said. "There is no bubble out there which you can tell when it was going burst. You could tell we were having a bubble. Most bubbles are benign."

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If the Fed is doing a good job and the economy is "balanced and moving forward, as it was leading up to [the financial crisis of] 2008, beware," Greenspan said.

"There's a bubble out there. In fact, a necessary and sufficient condition for a bubble being created is that everything looks extraordinarily tranquil, because that's when people jump in."

Greenspan says it's difficult for officials to fight against bubbles in their later stages. "When you're at the tail end of the bubble, it's inconceivable to say something against it," he said.

"I'm on record in transcripts, public remarks, making cautious statements. . . . You don't see it anymore."

It's important to note that human irrationality played a role in the housing bubble, Greenspan says.

"Everybody assumed a substantial part of human beings were rational. There are big disagreements on what proportion of it was not only irrational, but systematically so. Economists would essentially say if it were random, you could just forget it. But it's not, it's systematic."

So what can be done to prevent another housing bubble?

"The first thing I would say is a simple and very important decision to raise the regulatory capital levels that banks are required to hold," Greenspan said.

"You can try to regulate this or regulate that. People will behave in very unusual ways. But for the banks to have enough capital so they can absorb whatever losses occur because of very poor underwriting standards, to me that's the big solution."

The Fed celebrated its 100th anniversary Dec. 23 and has grown into one of the government's most powerful institutions.

"If Woodrow Wilson and the other architects of the Federal Reserve could have known how powerful it would become, they would have been shocked," Sung Won Sohn, an economics professor at California State University Channel Islands, told the Associated Press.

"There is no part of the global economy today which is not affected by actions of the Federal Reserve."

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Former Federal Reserve Chairman Alan Greenspan, who presided over much of the housing bubble before leaving office Jan. 31, 2006, says it was impossible to predict the destructive outcome of that bubble. It's a question of what's causing these various crises, he told...
alan greenspan,economic crisis,federal reserve,housing bubble
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2013-58-27
Friday, 27 December 2013 10:58 AM
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