Some housing bubble news from Wall Street and Washington. Financial Times, "US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market. The former chairman of the Federal Reserve said the decline in house prices 'is going to be larger than most people expect.'"

"As Fed chairman, Mr Greenspan had talked about 'froth' in the housing sector, but never said there was a bubble in the market as a whole. But Mr Greenspan told the FT that froth 'was a euphemism for a bubble.'"

From Newsweek. "Former Federal Reserve chairman Alan Greenspan was willing to sit down with NEWSWEEK's Jon Meacham and Daniel Gross. Q: 'The housing bubble has burst, the subprime-mortgage market has melted down and we're in a credit crunch. Critics have charged that the Fed contributed to the trouble by keeping interest rates low for so long.'"

"AG: 'This particular problem was an accident waiting to happen. The euphoria that existed in the expansion of the housing-market bubble induced investors around the world who'd had a huge buildup in liquidity—largely because of the lower real long-term interest rates that occurred as a consequence of the end of the cold war—to invest in something with a higher rate of return. And, lo and behold, the subprime-mortgage market provided it.'"

"Q: 'The mortgage brokers were just meeting demand from investors?'"

"AG: 'Precisely. And so you had Wall Street's securitizers basically then talking to the mortgage brokers saying, 'We'll buy what you've got.' ... The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford. We created something which was unsustainable. And it eventually broke. If it weren't for securitization, the subprime-loan market would have been very significantly less than it is in size.'"

The Wall Street Journal. "Q: 'So a bubble is the inevitable end of every business cycle?'"

"AG: 'It comes to an end under two conditions. One is a bubble, or some variation of a bubble, in which capital investment is projected with expectations which are not realistic. The other is … you get an inventory cycle. [At the bottom of the cycle] inventories are liquidating .. and consumption is above production and as it goes up, production goes above consumption until [inventories need to be liquidated again]. There is no irrational euphoria, it’s just misjudgments.'"

"Q: From the vantage point of 2007, can you say now that it was in a bubble?' AG: 'Oh yeah. Lots of froths are equal to a bubble… What was driving prices higher was essentially the aftermath of the decline of the Soviet Union and the fall in real long term interest rates which drove up residential prices all over the world. And indeed, the U.S. was not at the top of the list by any means. It drove them up sooner in Britain and Australia as I recall.'"

"'I find this issue that the Federal Reserve created the housing bubble just utterly devoid of any awareness of who created all the other bubbles. And they all look alike. Long-term real interest rates moved [in] parallel all over the world and the results were what you always get: a fall in equity [risk] premiums, a rise in price:earnings ratios, huge increases in liquidity, and large increases in the market values of assets.'"

"Q: 'Many people, including some former colleagues of yours from that period, believe the Fed kept interest rates too low for too long, thereby contributing to the housing bubble and problems in subprime mortgages. Do you agree?'"

"AG: 'We kept them too low for too long because we were effectively creating an insurance against [deflation]. The problem in making choices is that you recognize that if you miss, you can end up with interest rates too low, too long.'"

"'The question is, what did that have to do with the housing boom? Remember that long term Treasury rates and mortgage rates stayed flat from early 2004 through the summer of 2005 [while the Fed raised the federal-funds rate from 1% to 3.5% in 0.25 percentage-point steps]. We tried effectively to get mortgage rates up as part of our incremental 25 basis point operation and we failed… '"

"'If we were dealing with an inflationary environment, we would have had no trouble getting the 10-year [Treasury yield] up… Had we [raised rates] earlier, do you think we wouldn’t have gone through exactly the same phenomenon?'"

The New York Times. "John B. Taylor, a professor of economics at Stanford University and a former under secretary of the Treasury, recently argued that the Fed’s rate cuts after 2001 appeared to have exaggerated both the housing boom and bust."

"'There has been a bit of historical revisionism going on,' Mr. Greenspan grumbled. The real force behind soaring real estate prices, he said, was a global one: a drop in worldwide inflation and interest rates, in part because of the end of the Cold War and the rise of China as a manufacturing colossus.'"

"'The housing boom is not an American phenomenon — it’s a worldwide phenomenon,' Mr. Greenspan said. 'The evidence is quite overwhelming that what we are going through is a consequence of the fall of the Soviet Union and the shift of a billion workers from central planning in to the labor market.'"

"The United States was only one of 40 countries that experience a housing boom after 2000, he said, and all of the booms were driven in part by low interest rates."

"'If you line up all the major developed countries and all the developing countries...inflation rates were all in single digits. This is utterly unprecedented, there is no history like this. And the consequence was a fairly dramatic decline in real interest rates, which created dramatic housing price increases around the world.'"

From CNBC. "The Federal Reserve tried to curb the explosive growth in the U.S. housing sector under Alan Greenspan's tenure, but each time it tried to raise long-term interest rates it failed, the former Fed chief said."

"'In 2004 we tried to raise mortgage rates by moving the 10-year Treasury note up and we failed,' Greenspan told CNBC, adding that the Fed failed again in 2005 and would have failed had it tried in 2002."

"'We had no control, that I could see, which would have made any difference in the extent of the bubble that was emerging,' he said."

"'What we were responding to was global forces which every central bank was responding to,' he said. 'We had a continual, gradual decline in the rate of inflation. And, indeed, we were acutely aware that there are downsides to that, as well as upsides.'"

"'The upsides were … world economic growth of unprecedented order. Hundreds of millions of people coming out of extreme poverty. And there are all sorts of plusses to it,' Greenspan said. 'But there are downsides. And the downsides are what we're experiencing in bubbles.'"

"Greenspan also said an inflation target of 1% to 2% is unrealistic when the crutch of disinflation is gone."

"'The Fed does have the capability of suppressing the type of inflation process which is going on,' he said. 'The difficulty is it will require very significantly higher interest rates. And when Paul Volker successfully suppressed inflation in the early 1980s, he was vilified.'"

The Union Tribune. "Denial, anger, bargaining, depression and acceptance. Those are touted as the five stages of grief. But somewhere between denial and anger there is an important but rarely mentioned sixth stage: finger-pointing."

"And that's the stage where we are right now in the Great American Mortgage Crisis."

"Although there are many culprits to blame for this mess, topping the list is the Federal Reserve. The Fed of Alan Greenspan After the dot-com stock market bubble burst in 2000, Saint Alan steadily lowered the federal funds rate, flooding the global market with cheap and easy money. 'It was our job to unfreeze the American banking system if we wanted the economy to function,' he told CBS reporter Leslie Stahl last week. 'This required that we keep rates modestly low.'"

"Modestly low? That's like saying the electric chair is modestly dangerous. The federal funds was just 1 percent from mid-2003 to mid-2004, its lowest point since 1958. Considering that the official inflation rate was around 2.25 percent during that period, the Fed was essentially paying people to take money off its hands."

"Wall Street firms and international financiers that had been burned by the dot-com boom scooped up that cash and started buying bundles of mortgages, because nobody ever loses any money on real estate, right? To meet the demand for mortgages, lenders packaged a wide array of creative but risky loans."

"Speculators swooped in, using those loans to buy homes that they were never going to live in but would quickly flip because prices would just go up and up. Covetous homeowners refinanced their properties so they could buy the latest Humvee or flat-screen television. And a lot of working-class Janes and Joes got swept in too."

"Greenspan confessed to Stahl last week that he 'didn't really get' how serious a threat subprime lending could be to the economy until very late 2005 or early 2006. Just as he was about to leave office. After the subprime market peaked. After most of the damage had been done."

"That's funny, because as early as 2003, a number of economists were warning of a housing bubble, prompting Greenspan to assure Congress that 'the notion of a bubble bursting and the whole price level coming down seems to me, as far as a nationwide phenomenon, really quite unlikely.'"

"Unfortunately for his successor, Ben Bernanke, the Fed is now faced with just such a nationwide phenomenon."

"'A Fed funds cut will not bring back the U.S. housing market,' Wells Fargo economist Eugenio Aleman bluntly said. 'What if the housing market remains depressed? Then the markets will ask for another rate cut and another and another and another – and then what?'"

"The cheap cash that Greenspan and others injected into the world economy after the Asian economic crisis of 1997 helped fuel the stock market bubble of 1999. The cheap cash that Greenspan floated in 2000 helped fuel the real estate bubble. What new bubble will be created if too much cash enters the economy?"

"'The subprime mess was a bad investment decision from the very beginning and was brought about by having very low interest rates for a very long period of time,' Aleman said. 'And the only way to go forward is to flush it out, take the loss and move forward, not bring it back.'"

From Bloomberg. "Federal Reserve Chairman Ben S. Bernanke is grappling with what predecessor Alan Greenspan might call a conundrum. At issue is whether today's U.S. economy most resembles 1998, when Greenspan may have been too eager to cut interest rates, or 2000-2001, when he may have been too slow. The trouble is, the situation now resembles a bit of both."

"The Fed 'has been very slow to acknowledge what is one of the biggest busts in U.S. housing history,' says Allen Sinai, president of New York-based Decision Economics Inc."

"In remembering the lessons of 2000 too well, though, the central bank would risk losing ground in its fight to keep inflation contained."

"'Rate cuts are not free,' says Marvin Goodfriend, senior vice president at the Richmond Fed from 1993 to 2005 and now a professor at Carnegie Mellon University. 'You pay a price.'"

The Independent. "The housing market busts in the early Nineties in Scandinavia and Japan were very different in terms of intensity and duration. The Scandinavian countries suffered several years of collapsing house prices as well as deep economic and financial crises. These economies and property markets subsequently made quick recoveries."

"In contrast, the Japanese housing bust was less intense but it lasted a long time. Nearly 15 years, to be more precise. Between 1991 and 2004, real estate prices in Japan dropped 60 per cent. House prices in Tokyo plummeted 90 per cent."

"So what kind of housing adjustment are we likely to experience? Unfortunately, the prospects for a soft landing are growing dimmer by the day. Anecdotes suggest that the much anticipated autumn selling season opened with more of a whimper than a bang. Recent readings show a sharp drop in confidence among households and builders. These are hardly ingredients for a soft landing."

"In a US Federal Reserve study of 44 house price booms and busts in industrial countries since 1970, the average bust lasted nearly five years. More precisely, real (that is, inflation-adjusted) house prices typically declined for almost five years after the peak."

"Japan's biggest problem was that they attempted to sweep the consequences of the housing bust under the carpet. You see, when housing markets go bad, lots of money is lost. Be it homeowners, property investors, developers, banks, and taxpayers, someone has to take the hit."

"The Japanese wasted a decade-and-a-half arguing over how to allocate the losses, and their economy stagnated in the meantime. Let's hope we don't do that."