KEY POINTS:
The US sub-prime mortgage crisis was an "accident waiting to happen" as a period of unprecedented global growth seduced investors into underpricing risk, former Federal Reserve Chairman Alan Greenspan argues in an article published by the Wall Street Journal.
While acknowledging the low US interest rates set under his leadership may have contributed to the bubble in US home prices, Greenspan said he felt the roots actually lie with global economic expansion.
"The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World."
The growth of fairly educated low-cost workers, and exports from developing countries flattened wages in those countries and reduced inflation expectations globally, including those embedded in global long-term interest rates, Greenspan said.
"In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities. Simple correlations between short- and long-term interest rates in the US remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates."
Greenspan noted that home prices had risen sharply around the world.
- REUTERS
