Greenspan Backs Housing Cash Aid

Alan Greenspan said he could support the use of public cash to help struggling US homeowners on Sunday, in remarks likely to fuel growing political pressure for a more radical response to the housing crisis.

The former chairman of the Federal Reserve told ABC’s This Week programme the least harmful way of intervening would be to give direct financial aid to distressed homeowners. 

He appeared to criticise the plan brokered by Hank Paulson, US Treasury secretary, for an interest rate freeze on some subprime loans, warning that freezes would protract the crisis, not resolve it.

“Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this,” Mr Greenspan said.

“It’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.”

It was vital that policymakers allowed the markets to reach a “selling climax”, after which markets would stabilise and volumes pick up as buyers were attracted back by low prices.

He did not endorse any of the existing plans for more public action.

The remarks came in an interview in which Mr Greenspan said the US – which reported annual inflation of 4.3 per cent on Friday – was seeing the “early symptoms” of “stagflation”.

He said he was “most concerned” about the risk that inflation would move up, particularly in the medium term.

It was “critically important that the Fed is allowed politically to do what it has to do” to keep inflation down.

Mr Greenspan thought the probability of a US recession had “moved up close to 50 per cent” – though he still put it a fraction below the 50 per cent mark.

The minimum likely loss on subprime and related housing securities was now $200bn (€139bn, £100bn), he said, adding that it could be as high as $400bn.

Mr Greenspan said the probability of recession was not higher than 50 per cent because the US corporate sector had taken advantage of the long period of very low long-term interest rates that preceded the crisis to lock in long-term funds at attractive rates and this had insulated business from the credit squeeze.

While ordinarily a sharp tightening in financial conditions “would have been a very major problem for the American economy”, he said, “it is clearly less so today”.

He added that “the credit needs have not been all that large”.

Mr Greenspan also noted that consumer spending remained resilient, in spite of many factors that would be expected to hold it back, such as falling house prices, high oil prices and reduced availability of credit.

But he warned that the US economy was “going to stall speed” and would be vulnerable to additional shocks that could tip it over the brink into recession.

It would be impossible for financial markets to stabilise until there was greater certainty about where house prices would level off, Mr Greenspan said.

This is because most housing-related securities are based on recent vintage loans with only a tiny cushion of home equity, and this makes their value hugely dependent on house prices.

He said prices would begin to stabilise when the rate of liquidation of the stock of unsold homes peaked, rather than when the excess stock was completely exhausted.

Financial Times