WASHINGTON – Former Federal Reserve Chairman Alan Greenspan was cautiously optimistic about an economic recovery while speaking to CUNA’s Government Affairs Conference yesterday, in stark contrast to his last appearance at the GAC when his suggestion that homeowners try adjustable-rate and other non-traditional mortgages helped spark a flurry of exotic mortgages.
Greenspan said that high-income individuals with growing investment portfolios and companies with rising stock prices are driving the recovery, which he described as "extremely unbalanced."
"We are recovering, but the really forceful areas of recovery in the U.S. ...are reasonably dead," he said, noting that the housing market and auto sales figures remain subdued.
"Small businesses also continue to face challenges, and while things aren’t getting worse for them, the environment is "showing very few signs of getting better," said Greenspan, known as the Maestro in the title of his best-selling biography of his 18 years heading the central bank.
Yesterday’s appearance came exactly six years to the day Greenspan last spoke at the GAC when his much-listened to remarks helped spark a flurry of ARM and non-traditional mortgage purchases by borrowers hoping to buy homes in the booming real estate markets around the nation. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan said then. "To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."
Research by the Fed, said Greenspan, suggested that many homeowners might have saved tens of thousands of dollars had they held ARMs rather than fixed-rate mortgages during the prior decade.
Since then Greenspan has conceded that much of his economic philosophy was built on a faulty premise, that markets are self-correcting.
Greenspan said little about his Feb. 23, 2004 GAC appearance yesterday but was generally downbeat about the economy. With both housing starts and auto sales "dead in the water," he said he thought it would be difficult to make the case that the economy is poised for a strong rebound," he said.
"It's really an extraordinarily unbalanced system because we're dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year," said Greenspan, who headed the Fed from 1987 to 2006.
Greenspan said that while the economy was in worse shape in the Great Depression, the recent financial crisis was potentially more harmful than that in the 1930s because "never had short-term credit literally withdrawn."
