Former Fed chief Alan Greenspan said today on CBS's This Week that more major financial institutions may fail and that the government should not protect them all. He believes that the turmoil in the financial markets, which he said were "once in a century" occurrences will not end until housing prices stabilize. He believes prices will stabilize sometime next year.
"Let's recognize that this is a once-in- a-half-century, probably once-in-a-century type of event...There's no question that this is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go. And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system."
Of course, many would argue that the problems we're seeing are a result of Greenspan's easy monetary policies. Low rates in the 1990s and the early 2000s, on Greenspan's watch, led to both the tech and housing bubbles. The collapse of the tech bubble in 2001 along with 9/11 was the catalyst for the housing bubble. The Fed was caught off guard. While the rate of inflation on basic goods stayed low, the massive liquidity pumped up the values of tech stocks and then real estate. As we're discovering now, bubbles, if left to grow, can be severaly damaging to an economy.
As Greenspan said, we just have to wait for housing prices to stabilize. Until then, any fix is just like trying to secure a foundation built on quicksand.
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