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Greenspan - Houses To Fall Dramatically

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US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market.

In an interview ahead of the release on Monday of his widely-anticipated memoirs, the former chairman of the Federal Reserve said the decline in house prices “is going to be larger than most people expect”.

http://www.ft.com/cms/s/0/31207860-647f-11...00779fd2ac.html

More bear food and its not even Monday yet,

SB

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I think you all missed a bit.

US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market.

In an interview ahead of the release on Monday of his widely-anticipated memoirs, the former chairman of the Federal Reserve said the decline in house prices “is going to be larger than most people expect”.

Greenspin elucidated on the UK market: "I don't see any falls likely over in the U of K." He insisted, "If anything, I see a 3 per cent growth in the coming year, there's a guru at their Nationwide Burdening Society over there, and she says that, and that's good enough for me. You know, over there prices only really ever go up, they've a shortage of homes you see and a massively expanding population, and their incomes are very high with low unemployment and a strong manufacturing base. House prices there only go up, did I say that already? You look doubtful! What, you want a piece of me?"

-joke (I hope) ;)

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You are on a roll keep it up :lol::lol::lol:

Thanks tigs, I'd better stop now or the mods will get cross, supposed to be a serious forum after all, but when I see some of the rubbish bleated in the press by dopey or boozed-up journos and high horse pundits the only way I can diffuse my irritation is to try and be humorous. Am really pleased it made you and others smile, I can't tickle everyone's funny bone but even a few's good enough for me!

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Alan Greenspan thinks house prices may fall double digits. I agree with him but me thinks he should keep his mouth shut ....He caused this why does he think he should get credit from calling its demise ???

He doesn't, he thinks if he keeps speaking he might be able to blame enough other people to save his legacy.

Anyway, nice for him to mention the coming deflationary recession. Deflation all the way down.

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You can see the headlines next week.

"Greenspan the great, tripped over his shoelace, and fell over board of the luxury yacht Mr Bush had chartered for him on his return to the US, its a shame i know, but as old Blue eyes would say thats life"? ;)

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Similar article in the Telegraph

http://www.telegraph.co.uk/money/main.jhtm...cngrspan117.xml

Alan Greenspan warns of UK house prices drop

Alan Greenspan, the former head of America's central bank, the Federal Reserve, issues the prediction in an exclusive interview with The Daily Telegraph today.

Alan Greenspan,

Alan Greenspan warned recent increases in house prices were unsustainable

He warns of "difficulties" ahead for UK home owners, as rising interest rates bring house price growth to a shuddering halt.

The warning comes only days after the Bank of England was forced to bail out the mortgage lender Northern Rock, amid the escalating credit crunch in the City and markets around the world.

Mr Greenspan, the central banker for a number of United States presidents from Ronald Reagan to George W Bush, also says that Britain's economy is even more exposed to the financial turmoil than that of the US.

In a wide-ranging interview he also warns that:

• Inflation will pick up dramatically over the coming years, as much as doubling from its recent lows.

• Interest rates may have to hit double figures in the coming years to keep price rises at their current low levels.

• Britain must overhaul its flagging education system or risk being left behind by other vibrant economies around the world.

However, Mr Greenspan provides some reassurance about Britain's prospects in the coming decades, saying it will be one of the best-performing Western economies, thanks to the Thatcherite reforms of the 1980s and the strength of the City.

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The UK "may be one of the most competitive economies in the world", he adds. However, it is Mr Greenspan's warning on housing and interest rates that will cause most consternation.

The 81-year-old economist, an adviser to Gordon Brown, said that recent increases in house prices - particularly those in London and the South East - were unsustainable.

"There are going to be some difficulties," he says. "Can [the boom] last No. You're already beginning to see the mortgage rates are moving; a lot of the two-year fixes are beginning to unwind, and the teaser rates are going," he adds, referring to mortgages where rates jump after an introductory period.

He says that banks are already being forced to write off billions of pounds of debt.

"It's going to turn, it's got to turn," he says.

Mr Greenspan also warns that Britain is more vulnerable to the effects of the credit crunch than the US.

"Britain is more exposed than we are - in the sense that you have a good deal more adjustable-rate mortgages," he says, referring to the standard variable rate loans that many households have chosen over fixed-rate deals.

The Bank of England has raised interest rates five times in the past year to their current 5.75 per cent.

However, the instability in money markets has meant that the effective rate paid by millions of families - the so-called standard variable rate - has actually risen to heights it last hit when the Bank rate was a full percentage point higher at 6.75 per cent.

"In Britain the housing [market] hasn't turned yet, and the consumer households are more subject to interest rate changes than in the United States," he adds.

His warning comes with the UK banking system in a state of crisis.

Worried customers have withdrawn £2bn from their accounts with Northern Rock since Friday, when it emerged that the high street bank has had to arrange an emergency loan from the Bank of England to prevent it from collapsing.

There are also growing signs that after a decade of almost uninterrupted growth the housing market is slowing dramatically. Rightmove and the Royal Institution of Chartered Surveyors have reported a sudden dive in prices.

Although he expects the housing market to take a turn for the worse, Mr Greenspan says the UK economy is well placed to deal with shocks, because the reforms following the miners' strikes in the 1980s made it a more flexible place to do business.

"You [in the UK] haven't even had a taint of a recession for an extremely long period of time – and a goodly part of that is the flexibility that came out of the crush between Scargill and Thatcher," he says.

"That was the defining moment, and to their credit Blair and Brown did not endeavour to unwind it. They recognised that there was something fundamentally good for British labour in having a flexible economy.

"It's like tough love, as we call it. It's unhappy-making, but in the end it works."

Edited by Saving For a Space Ship

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Alan Greenspan thinks house prices may fall double digits. I agree with him but me thinks he should keep his mouth shut ....He caused this why does he think he should get credit from calling its demise ???

Spot on.

I really wish that somebody would wheel this geriatric idiot off to his retirement home so he can babble b0ll0cks into his cold porridge. This chancer will go down in history as being the architect of the world's biggest ever bubble.

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Spot on.

I really wish that somebody would wheel this geriatric idiot off to his retirement home so he can babble b0ll0cks into his cold porridge. This chancer will go down in history as being the architect of the world's biggest ever bubble.

Nicely put

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http://www.ft.com/cms/s/0/31207860-647f-11...00779fd2ac.html

A global outlook

By Krishna Guha in Washington

Published: September 16 2007 20:03 | Last updated: September 17 2007 00:00

Most people think that if Alan Greenspan were still chairman of the Federal Reserve, the US central bank would have cut interest rates more quickly and aggressively in response to the turmoil in financial markets.

Not so, Mr Greenspan says. Over the course of three hours of interviews in his office on Washington, DC’s Connecticut Avenue, the former Fed chairman argues that times have changed.

“We are in a period now when it is far more difficult than it was when I was chairman,” Mr Greenspan says. “We were not worried about inflationary resurgence but now you have to be.” He adds: “You have got to be a lot more careful in lowering rates in response to crises.”

Mr Greenspan’s analysis puts him at odds with those – including Martin Feldstein, the influential president of the National Bureau of Economic Research – who argue that the Fed should cut rates aggressively on the grounds that making a mistake on inflation (as opposed to growth) would be the “lesser of two evils” at this juncture.

The former Fed chairman does not share this assessment of the balance of risks. “I weigh them differently,” he says.

Mr Greenspan – who is revered in the market for his aggressive handling of past market crises – praises his successor Ben Bernanke’s so-far cautious response to this one. “I would be hard-pressed to see what I would have done differently,” he says.

The former Fed chairman is at once candid and slightly uncomfortable about commenting on current monetary policy debates. “I figured that there is no way to maintain what I have been doing and not comment on monetary policy, because I did so effectively – implicitly – in the book.”

Mr Greenspan says: “I am basically saying that the trade-off between unemployment and inflation has shifted.”

There are two planks to his argument. The less controversial one is that the US is entering a period of more subdued productivity growth. The former Fed chairman says companies would not be returning vast amounts of cash to their shareholders if they saw good opportunities for productivity-enhancing investment. “Innovation opportunities are, for the time being, somewhat saturated, whereas they were extraordinary in the 1990s,” he says.

The more controversial one is that the disinflationary effect of globalisation will soon start to ebb. “The rate of change of prices – or the degree of disinflation – is related to the rate of change of globalisation,” he argues.

The integration of a billion workers from the once centrally-planned economies of China and the former Soviet bloc into the global market system had a profoundly disinflationary effect on prices worldwide. But once all these workers are connected to the world economy, he says, “the rate of change goes to zero.”

“In the intermediate period, the disinflationary pressures I was fortunate to operate under are gradually disappearing.”

Mr Greenspan is unimpressed by the rejoinder that inflation expectations look to be quite firmly anchored at low rates. “It is going to change,” he says, fixing the interviewer through his trademark thick black-rimmed glasses.

Underlying cost pressures are beginning to increase. He also sees oil going to $100 a barrel and worries about rising deficits driven by entitlement spending as America and the rest of the rich world ages. “In that environment, inflation expectations will rise,” he says, without the need for the Fed to make a policy mistake first.

Many economists contest Mr Greenspan’s version of the relationship between globalisation and inflation. But in some respects his precise formulation of this relationship is less important than his deep conviction that it is no longer possible to understand how the US economy operates without seeing it as part of a global economic system that is undergoing profound transformation. “The issue is that the global forces are profoundly overwhelming,” he says. “We cannot make a forecast for the US economy the way we used to.”

This global analysis lies at the heart of his explanation of what caused the housing bubble that emerged during his watch as Fed chief. Mr Greenspan says the housing bubble was “fundamentally engendered by the decline in real long-term interest rates” caused by a cascade of surplus savings from fast-growing emerging market economies such as China. The fall in long-term rates provided the initial gain in house prices that unleashed later speculative activity. He blames human nature – though he talks about “euphoria” rather than “greed”.

To his critics, who argue that the Fed fuelled the bubble by keeping interest rates too low for too long in the early 2000s, this is an exercise in passing the buck. But to Mr Greenspan, theirs is a parochial explanation that greatly exaggerates the Fed’s power in a world of globally integrated capital markets.

When the Fed raised rates in 2004 and 2005, he points out, long-term rates went down rather than up. “We were pushing against something we could not control,” he says. Long-term rates were “being determined external to monetary policy” by shifts in the global balance of desired savings and investment.

Critics say the Fed should have tried harder, raising rates sooner and faster. Mr Greenspan counters that that would not have been acceptable “to the political establishment” given the very low rate of inflation. He says “the presumption that we were fully independent and have full discretion was false.”

But he says that even if the Fed had moved to raise rates more aggressively “we would have failed as miserably in trying to get the long-term rate up or the mortgage rate up as we failed in 2004.”

Mr Greenspan is more certain than ever before that central banks should not try to burst bubbles once they begin to inflate. “I am coming to the conclusion that bubbles are inevitable,” he says. “Human beings cannot avoid them . . . They cannot learn.”

Indeed, he argues that limited efforts to suppress bubbles generally fail and make them “worse rather than better”. Instead, he says, a central bank should clean up afterwards – while avoiding doing anything that might reflate the bubble. After the dotcom bust, he says, “we actually delayed moving the Fed funds rate down until it was very clear that the Nasdaq was significantly deflated.”

Many who support Mr Greenspan’s argument that Fed rate policy did not cause the housing bubble still think it should have done much more on the regulatory front to limit its damage.

The former Fed chairman, though, contests this. “The real problems you are dealing with are criminal,” he says, pointing to abusive mortgage brokers who misrepresented the products they were selling. “It is called fraud – fraud or stealing. In this country it is a criminal offence,” he says – raising his voice for the first and only time in the interview.

Mr Greenspan says fraud is a matter “for the attorneys-general of the states”, not the Fed. “Putting 10 of these guys in jail will do more than you can imagine,” he says.

The former Fed chairman says he resisted expanding the Fed’s supervision of mortgage lenders out of fear that unscrupulous brokers would “put a sign in their windows saying ‘regulated by the Federal Reserve’” and fleece even more people.

Mr Greenspan points out that there was a housing boom – he avoids using the word bubble this time – in at least 40 different countries.

“The US is by no means above the median,” he says, adding that long-term interest rates “were falling everywhere, including in the developing world” – where he says inflation has fallen to remarkably low levels.

Other big central banks were also running easy monetary policy in the early 2000s, but Mr Greenspan does not believe that even collectively they were driving long-term rates. “Every central bank was confronting the same global forces we were and responded as a central bank would,” he says.

In Mr Greenspan’s eyes, these global forces are largely market forces, unleashed by global economic liberalisation. He says central banks could probably not control long-term rates even if they tried to intervene directly in long-term markets.

Moreover, he thinks the influence of even those governments that control large foreign exchange reserves is not all that great on the markets. Japan, he notes, sold yen for dollars on a massive scale in 2003 and early 2004 before abruptly stopping its currency intervention. “The impact of their going from huge accumulation of dollars to none was barely visible in the dollar-yen exchange rate and in interest rates and in everything else,” he says.

Mr Greenspan admits that if China stopped buying dollars and switched its holdings into euros “it would move the long-term Treasury rate.” But, he says, “I would bet you it is not more than 50 basis points.”

The surplus savings, he says, have to be put somewhere, and do not disappear from the global financial system even if they are swapped out of dollars into other currencies.

The world he is describing looks like a global market nirvana – with one very odd feature: profits are much higher than they should be in a world of ever-intensifying global competition.

He says: “We know in an accounting sense what is causing it” – the share of worker compensation in national income in the US and some other developed countries is unusually low by historical standards – “but we don’t know in an economic sense what the processes are.”

In the long run, he says “real compensation tends to parallel real productivity, and we have seen that for generations, but not now. It has veered off course for reasons I am not clear about.”

It is striking that he does not, as many do, blame China. He agrees that companies should not be able to price above their marginal cost, as many apparently can today. “They should not be able to,” he says. “And the issue here is that there are restrictions that they are not identifying that enable them.” He adds: “The competition should be moving in.”

Mr Greenspan says “I did and still do” expect some normalisation of profit and wage shares. But asked whether the high profit share remains a puzzle to him, he says: “Yes, it does.” In his book, he worries that if wages for the average US worker do not start to rise more quickly political support for free markets may be undermined.

Longer term, his big concern is that the economic context for the US will become less favourable as the disinflationary force of global integration ebbs and rising consumption in China and other emerging markets reduces the savings glut and pushes up longterm interest rates.

He says his analysis of global savings trends is very similar to that put forward by Mr Bernanke in a speech to the Bundesbank last week – “with one exception.”

“He is calculating adjustment over the decades,” he says. “I doubt that.”

Mr Greenspan admits that he lacks strong evidence that it is short term” but he adds with a smile: “I know he doesn’t have any evidence that it is long term either.”

Copyright The Financial Times Limited 2007

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Mr Greenspan also warns that Britain is more vulnerable to the effects of the credit crunch than the US.
"Britain is more exposed than we are - in the sense that you have a good deal more adjustable-rate mortgages," he says, referring to the standard variable rate loans that many households have chosen over fixed-rate deals
.

Some have wondered why I am a dollar bull-sterling bear. Big Al sums it up nicely. Both currencies may be in trouble but Gordon's pound is deeper in it.

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I do feel this a little tit-for-tat, after Mervyn criticised 'other' banks (ie the US FR) of encouraging problems further down the road.

That's not to say there's no truth in it, just that the FR have a VI in talking down the pound.

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