Greenspan Unconcerned About Housing

By Nell Henderson
Washington Post Staff Writer
Tuesday, November 7, 2006

Former Federal Reserve chairman Alan Greenspan said yesterday that home sales and prices may continue to slide for some time, but the broader U.S. economy appears poised for a rebound.

"It looks as though the worst is behind us" in terms of the effect of the housing slump on economic growth, he told financial advisers at a conference in Washington organized by Schwab Institutional, a division of Charles Schwab & Co.

"We're obviously going through a significant slowing period, which as best as I can judge is quite likely to be temporary," said Greenspan, 80, who retired in January after more than 18 years leading the world's most influential central bank and whose words are still closely monitored in financial markets.

U.S. economic growth slowed sharply, to a sluggish 1.6 percent annual rate, in the July through September period, largely because of a steep drop in home construction. Home sales and prices have also fallen recently in many markets.

Greenspan, a private consultant, said the housing downturn has "a way to go" before it hits bottom, but its effect on the rest of the economy should abate in the months ahead.

Other U.S. industries are enjoying healthy profits, consumer spending has remained solid and "the global economy is in extraordinarily good shape," he said. "Things don't look bad."

Greenspan made his comments during an hour-long question-and-answer session. Since leaving the Fed, he has created a consulting firm, Greenspan Associates LLC, started work on a memoir and made various appearances before paying audiences. During his last year as Fed chairman, Greenspan often said he did not see a national housing bubble, but rather "froth" in some markets. At the conference yesterday, however, he attributed much of the recent housing boom to a "speculative surge" caused by global financial conditions that pushed mortgage rates down to very low levels until the last year.

Greenspan said he could not predict when home sales would begin rising again or when home prices would stabilize. He said of prices, "it's hard for me to believe that they can stabilize at the level they are now because we had too much of a speculative surge. We have to lose some of that."

Greenspan said nothing about current Fed policy, but he defended the central bank's actions during his tenure, disagreeing with one former colleague about whether the Fed fueled speculative investment in housing by holding interest rates too low for too long in recent years.

The Fed cut its benchmark short-term rate from 6.5 percent at the beginning of 2001 to a four-decade low of 1 percent in mid-2003, providing cheap credit to support consumer spending through a recession and the initially weak recovery. The Fed held that rate steady until June 2004, before raising it steadily to 5.25 percent this past June.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said in a speech Thursday that because of faulty price data during this period, the Fed's benchmark short-term rate, adjusted for inflation, was cut to a level that "turned out to be lower than what was deemed appropriate at the time, and was held lower longer than it should have been."

The Fed's policy "amplified speculative activity in the housing and other markets," Fisher said. Now, he added, the correction in the housing market is "inflicting real costs to millions of homeowners across the country" and complicating the Fed's task of containing inflation.

Greenspan disputed such criticism, saying the recent housing boom resulted not from Fed cuts of short-term interest rates, but rather from global financial conditions that lowered long-term mortgage rates worldwide. "In retrospect, I know of nothing we would have done differently," Greenspan said of Fed policy during those years.

Greenspan also said globalization had helped dampen inflationary pressures during his years as Fed chairman, as low-wage workers in China, India and the former Soviet Union started providing low-cost goods and services to the world's market economies. But he said that transition "is a one-shot event, not a permanent change" that will hold down price pressures indefinitely.

Eventually, he said, inflationary pressures will revive, making life more difficult for his former colleagues at the Fed.

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