Alan Greenspan has spoken out in another prominent interview, airing opinions that, despite his retired and partially discredited status, continue to shape and cement market expectations.

The maestro of the housing bubble opined that the subprime crisis should play itself out and national housing prices should “start to stabilize, or touch bottom, sometime in the first half of 2009.”

Calling such a stabilization a “necessary condition for an end to the current global financial crisis,” Greenspan noted that the financial markets will be taxed by an exceptionally high level of uncertainty until bank assets can be more firmly pinned down once consensus is reached on the value the mortgage-backed securities held by major financial institutions.

Noting that before the subprime crisis, more than half of all foreclosures were eventually resolved without the loss of the property, Greenspan approved of hefty foreclosure assistance from the federal government.

Greenspan affirmed the accuracy of the estimations that there are over 800,000 excess homes on the market and argued that prices won’t stabilize before demand catches up then the current levels of over-supply.

Greenspan focused on the role of active, large real estate investors in speeding up the recovery in the housing industry. Comparing housing to wheat or corn, he looks at large investors willing to snatch up and then hold vacant homes at bargain prices as a major enzyme in the market’s functioning.

Greenspan was highly critical of the government’s recent actions in regards to Fannie Mae and Freddie Mac. Pointing out the obvious, that the current system socializes losses but privatizes profits – and does so to the tune of trillions of dollars – Mr. Greenspan argues that the new regulatory body the housing law creates is ineffective and incapable of significantly altering the socialized risk/private profit scenario.

Greenspan argued that the two institutions should have been fully nationalized, and then divided into smaller units. Those units should have then been eventually auctioned off to private financial institutions after they had regained their value.

It is worth noting perhaps, that this puts him far the left of the Democrats in Congress, led by Representative Barney Frank on this issue. The supposedly progressive Democrat wrote a far less responsible bill, one that basically subsidized the two institutions’ losses with taxpayer dollars, relatively free of charge.

In the end, Mr. Greenspan may be derided currently as a major cause of the current housing crisis, but the real reason for the housing crisis was the makeup of US legislated housing subsidies, not the actions of the Fed. The latter may have exacerbated the problems of the former, but the reality is that if economic policy is focused almost solely on home ownership at the expense of responsible rent subsidies, then the reality is that housing bubbles will exist.

To the extent that Greenspan did not use his significant credibility with policymakers, markets and the general public to help push for a more technocratically-sound housing policy, even as the nation was worried about a housing bubble – to that extent he can be savagely critiqued, down to basic issues of competency. However, to put the blame on him alone and not the whole set of proponents of the type of economics to which elites find convenient to adhere is simply localizing a problem away from its obvious intellectual conclusions.


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