WASHINGTON (Thomson Financial) - The financial turmoil that erupted in August was 'an accident waiting to happen,' and would have taken place in some other sector of the market if it were not started by changing views about the subprime mortgage loans, former Federal Reserve board chairman Alan Greenspan said.
'Credit spreads across all global asset classes had become compressed to clearly unsustainable levels,' Greenspan told an audience at the World Bank's International Finance Corporation.
'Something had to give. If the crisis had not been triggered by a mispricing of securitized US subprime mortgages, it would have eventually erupted in some other sector of our market,' the former Fed chief said.
Greenspan defended his decision to lower the key federal funds rate to 1 pct and said the housing bubble was not caused by the US central bank.
'Central banks around the world have essentially lost control over the markets beyond three or four or five years out,' Greenspan said, noting that the long-term interest rates did not rise as the federal funds rate was increased, starting in 2004.
US housing is primarily financed with mortgages based on 30-year interest rates.
Greenspan said proof of his argument is that housing bubbles emerged in nations throughout the globe, where the Fed does not control interest rates.
'If indeed, it is short-term interest rates that created the bubble in the US, what created the bubble' in Europe, Australia and other parts of the world, Greenspan asked rhetorically. corbett.daly@thomson.com cbd/wash/ro COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.