WASHINGTON — Since the end of his tenure as chairman of the Federal Reserve in 2006, Alan Greenspan has been harshly criticized in many quarters for failing to predict the monumental collapse of the housing market that began under his watch.

Speaking at a Real Estate Summit Tuesday during a National Association of Realtors annual midyear conference at the Marriott Wardman Park Hotel, Greenspan hit back, and denounced a "recalibration of financial history that I find very puzzling."

Long regarded as a "maestro" for guiding the economy and, by extension, the real estate market in more prosperous times, he was still greeted as such by hundreds of real estate brokers from across the country, with rounds of applause and standing ovations.

Greenspan said that easy access to money and credit through the Fed in short-term interest rates were not what spurred the growth in housing — rather, it was long-term rates. Moreover, he asserted, the housing market began to surge in 2000 — not 2001, when the Fed began raising interest rates, as critics contend.

"The issue of Federal Reserve policy," he claimed, was not "critical" to the failure of the housing market.

To a great degree, he added, many of the misfortunes of the American economy in general — and the housing market in particular — have also been driven "by human psychology" amid "extraordinary conditions."

"You cannot get too euphoric, and you cannot get too fearful," he said. "Prices of homes are a very ambiguous sort of thing."

Most importantly, he said, the potential for continuing declines in home prices "is, to me, the Achilles’ heel" for an American economy that is "otherwise running extraordinarily well in recent weeks." …CONTINUED

Despite the guarded optimism — echoed by other speakers at the summit — Greenspan said the U.S. economy could tolerate only an additional drop in home equity by 5 percent before a large majority of mortgages go "underwater."

The economic contraction, which began in the U.S. and spread worldwide, is "integrated into the world like never before," Greenspan noted, and is a source of both momentous opportunity and serious peril.

The housing market, not unlike other sectors of the American economy, could well suffer from the winds of domestic politics favoring insular policies with respect to trade and other economic activity.

"If we draw in our horns and go into a protectionist mode, that will contract our standards of living," he said.

One of the biggest challenges facing the Obama administration in the mortgage crisis, he noted, will remain its stewardship of Fannie Mae and Freddie Mac. These are two institutions, Greenspan says, that he had been at serious "loggerheads with" since 2003.

"What has to happen is to get through the receivership in a way that they can function," he added.

Joseph Kirschke is a freelance writer in Washington, D.C.


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