Greenspan: Current account 'not a huge problem'
Ex-Fed chief says adjustment needn't have an impact on real economy
By Rex Nutting, MarketWatch
Last Update: 4:33 PM ET Oct 21, 2007
WASHINGTON (MarketWatch) -- The inevitable adjustment in the U.S. current account deficit is "not a huge problem," former Federal Reserve Chairman Alan Greenspan said Sunday.
The unwinding of the current account deficit is causing undue alarm, he said, speaking at the annual meeting of the International Monetary Fund and World Bank.
There's no reason why the adjustment in the current account deficit should have a major impact on the real economy and employment, despite swings in terms of trade, interest rates and foreign exchange rates.
However, if protectionism gains ground and fiscal deficits continue, "the process could be quite painful for us and our trading partners," Greenspan said.
Greenspan said what's important is the level of debt, not whether it's owed to foreigners or fellow countrymen.
"It's the level of debt, not the source of its financing, that should engage us," he said.
Greenspan said debt levels in relation to income have been rising for a century, but only recently have cross-border flows of savings become important. He said investors have lessened their bias toward investing at home, expanding their investment horizons.
Subprime
The housing bubble wasn't the Fed's fault, Greenspan said. "Central banks have lost control of the markets," he said. The Fed raised short-term rates in 2004, but mortgage rates didn't respond, he said. Global forces kept long-term rates low, fueling the housing boom, he said. The same pattern was seen in other countries, such as the United Kingdom and Spain, he said.
Greenspan said the subprime market has failed. "There's nothing carved in stone" that says every innovation is worthwhile. Some "fail and they deserve to fail."
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