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WASHINGTON : The financial turmoil that erupted earlier this year in the US sub-prime housing market was "an accident waiting to happen" and could have taken place in any other sector, former Federal Reserve chairman Alan Greenspan said here Sunday.
"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 securitised US sub-prime (high-risk) mortgages, it would have eventually erupted in some other sector of our market," the former Fed chief said.
Greenspan defended the Fed's decision to lower its key federal funds interest rate to 1.0 percent, seen in some quarters as having encouraged risky borrowing, and said the US housing bubble had not been 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 long-term interest rates did not rise as the federal funds rate was increased, starting in 2004.
US housing is primarily financed by mortgages based on 30-year interest rates.
As US housing prices fell earlier this year and as interest rates started to rise, the sub-prime sector suffered a wave of foreclosures that ultimately put securities backed by such mortgages at risk.
Greenspan noted that housing bubbles had 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. - AFP/ch
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