BT: Greenspan, Soros warn of more US housing pain

Business Times - 06 Nov 2007
LAST UPDATED 5.27PM

Greenspan, Soros warn of more US housing pain

TOKYO - Former Federal Reserve chairman Alan Greenspan and billionaire investor George Soros warned of more pain ahead for the US economy, saying the downturn in the housing market had yet to take its full toll on growth.

Mr Greenspan told a forum in Tokyo on Tuesday that high inventories of unsold homes presented a major risk to the US economy and financial markets and that he was not sanguine about how quickly the glut could be reduced.

'We still need to accelerate the rate of inventory liquidation, and that will mean bringing housing starts down and sales up. We have a long way to go,' said Mr Greenspan, who was answering questions at a CEO conference in Tokyo via video link from Washington.

The surge in defaults in sub-prime mortgages has taken a toll on major financial institutions, leading to billions of dollars in asset write-downs and the departures of the chief executives of Merrill Lynch and Citigroup.

Citigroup's additional US$11 billion write-down tied to sub-prime mortgage revived fears about the extent of the credit crunch, hurting equity markets and the dollar while keeping benchmark US Treasury yields near a two-year low.

Mr Soros said in a lecture at New York University that the US economy was on the verge of a serious correction and that the Federal Reserve may be underestimating the potential slowdown.

'I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing,' he said.

The comments came after Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, said on CNBC Television the Fed cannot afford to let US housing prices fall sharply and would need to cut rates aggressively, perhaps to 3.5 per cent.

The Fed has slashed rates by a combined 75 basis points to 4.5 per cent in an effort to limit the damage on the broader economy from the housing market slide and ease some of the financial strains from the resulting credit crunch.

But Fed Governor Frederic Mishkin said on Monday that the Fed should be prepared to reverse its monetary easing if the US economy escapes major damage from the market turmoil, even as a recovery is a way off in housing and sub-prime mortgages.

Mr Greenspan said about US$900 billion of sub-prime mortgages have been securitised into fixed-income instruments, and the excess level of unsold homes is driving the price declines that are eroding the value of the securities backed by those mortgages.

'The critical issue on the whole sub-prime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States,' Mr Greenspan said.

PIMCO's Gross likened the US housing market downturn to the bursting of Japan's property bubble in the 1990s that dragged the world's second-largest economy into a protracted bout of deflation.

Mr Gross said the pain to household finances from adjustable-rate mortgages being reset higher had yet to be fully felt.

'We've only begun to see the pain from the standpoint of the homeowner in terms of those monthly payments. Defaults and delinquencies will increase as we extend throughout 2007 and then into 2008,' he said.

Inventories of existing US homes have jumped to the highest on record going back to 1999, while inventories of new homes remain at elevated levels as falling prices and tighter credit standards have deterred buyers.

But Mr Greenspan said the global economy was very powerful even with the 'extraordinary' rise in oil prices, and the underlying structure of the global economy was doing well. -- REUTERS