Former Federal Reserve Chairman Alan Greenspan said he expects the fallout from subprime-mortgage defaults to spread to other parts of the economy, especially if home prices decline.
``If prices go down, we will have problems -- problems in the sense of spillover to other areas,'' Greenspan said in remarks to the Futures Industry Association meeting in Boca Raton, Florida today. While he hasn't seen such spreading yet, ``I expect to.''
Subprime borrowers, or those with poor or limited credit histories, are increasingly defaulting after looser lending standards allowed them to take on more debt than they could afford. Last month, Greenspan told an audience in Toronto that ``disarray'' in the subprime mortgage market isn't likely to create greater financial instability in the rest of the economy.
``It is not a small issue,'' Greenspan said today. ``If we could wave a wand and prices go up 10 percent, the subprime mortgage problem would disappear.''
U.S. stocks pared gains after the remarks. The Standard & Poor's 500 index rose 3.54 to 1390.71 at 2:27 p.m. in New York after climbing as high as 1395.73.
Greenspan, who was Fed chairman for almost two decades until Ben S. Bernanke took over 13 months ago, has contrasted from his successor in his remarks on the economy. Greenspan said at least three times in the past month that a recession is possible. He didn't say one was likely. He said in an interview this month there's a ``one-third probability'' of a 2007 recession.
Bernanke's View
Bernanke said on March 2 that the central bank sees no ``spillover'' from the rising delinquencies in subprime mortgages. ``We're obviously going to watch it very carefully,'' he added. He told lawmakers Feb. 28 he expects the growth to accelerate. The Fed forecasts the economy will grow between 2.5 percent and 3 percent this year.
How can anyone expect there to not be a spillover effect? Housing was 40% of all job creation for the past 5 years.
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