Keeping Future Financial Issues Close to Home

Blame for the housing bust has been attributed to a number of factors and groups–but former Fed Chairman Alan Greenspan says the Fed isn’t at fault.

So who is?

Well, according to the Financial Times, Greenspan points to a global "dramatic fall in real long term interest rates," which he thinks was prompted by abundant worldwide savings.

And he’s confused about why the Fed is catching so much heat for its role in the housing crisis.

Greenspan does have a point: The Fed can’t fix everything. And other global economies with central banks saw big housing price increases in recent years:

  • London, for example, has seen skyrocketing prices in recent years; yet just last week, Bloomberg reported that luxury home prices in the
    world’s most expensive city for prime real estate grew at the slowest rate in four months in
    March.
  • And just recently, the International Monetary Fund said that Irish house prices still may be 30 percent too high.

Plus the U.S. isn’t the only country who has had to help out its banks. Both Germany and the U.K. bailed out four U.S. subprime mortgage-crippled domestic banks,  including Northern Rock and IKB Deutsche Industriebank AG.

Looking at the housing situation that way, the U.S. and global perspective seems very similar–except for one big difference: We started the problem.

And then it spread. At least 34 European Union banks have posted more than $77 billion
of losses and writedowns in connection with rising U.S. subprime
mortgage defaults, according to Bloomberg.

So now, everyone’s talking about reform–on a global level.

Bloomberg
reported today that the EU approved a new accord
to work together in financial crises; there was no decision about who
would fund a rescue if a multinational bank needs one, but the accord
came out of a general agreement that something was needed to contain
massive financial situations before they spread internationally.

The U.K. Treasury already has said that it wants "concrete
action" to improve financial market regulation after next
week’s Group of Seven finance ministers and central bankers meeting; to do its part, Britain has requested regulators meet more often and is encouraging its banks to disclose losses faster than before.

And the U.S. is working to prevent further economic plagues from spreading. According to the Chicago Tribune, the Fed and Treasury Department stepped in to help Bear Stearns from falling apart–an unusual move for the Fed–because its collapse could
have hurt financial companies around the world.

The Bear Stearns bailout could be a good start to further methods of prevention–ones that, in moderation, Greenspan might even agree with. He says a lack of regulation isn’t even really the issue–how much of the subprime mortgage fallout  we expected regulators to be able to ward off is.

"Doubtless each individual housing bubble has its own idiosyncratic
characteristics, and some point to Fed monetary policy complicity in the
U.S. bubble," he wrote in a response to the Times’ Economists’ Forum. "But the U.S. bubble was close to median world experience and
the evidence of monetary policy adding to the bubble is statistically
very fragile."

Do you agree?