KEY POINTS:
An unusually high degree of risk-taking across asset classes made recent financial market turmoil all but inevitable, says former United States Federal Reserve chairman Alan Greenspan.
"The financial crisis that erupted on August 9 was an accident waiting to happen," Greenspan said on the sidelines of the International Monetary Fund and World Bank meetings. "Credit spreads across all global asset classes had become suppressed to clearly unsustainable levels. Something had to give.
"If the crisis had not been triggered by a mispricing of securitised US subprime mortgages it would eventually have erupted in some other sector or market."
Greenspan himself has drawn criticism for cutting US benchmark interest rates to 1 per cent in 2003 and holding them there for a prolonged stretch, which some say helped inflate the US housing bubble. But he said it was low long-term interest rates set in financial markets that pushed down mortgage costs.
"Central banks around the world have essentially lost control over the markets beyond maybe three or four or five years out," Greenspan said. "In other words, there is no evidence that we at the Fed had the capability of affecting mortgage interest rates."
Defaults on subprime loans, made to borrowers with poor credit records, have spiked and set off a chain reaction that has tightened global credit conditions. That, in turn, raised worries about the US economy that sent the dollar tumbling.
The weaker dollar is helping curb a large US trade deficit by lending support to American exporters.
Some economists worry that the growing role of state-controlled investment funds may increase fears in the US about any takeover of strategic assets.
These sovereign wealth funds are thought to have US$2.5 trillion ($3.36 trillion) at their disposal, with much of that under the control of trade-surplus countries such as China, Russia and Middle East oil exporters.
Greenspan said Western countries were justifiably worried that the funds may base investment decisions on political rather than economic motives and such actions could destabilise financial systems.
