Greenspan Says Demand for U.S. Debt May Be at `Limit’
Former Federal Reserve Chairman Alan Greenspan said the dollar’s depreciation may reflect growing unwillingness among foreigners to buy U.S. debt.
“Obviously there is a limit to the extent that obligations to foreigners can reach,” Greenspan said in a speech in Washington today. The dollar’s decline to its lowest since 1997 may be “an indication America is approaching this limit.”
Greenspan’s warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. financial assets in August. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July.
The dollar has declined about 8 percent against the euro this year and 4 percent against the yen.
The former Fed chief, who published a 531-page memoir last month, spoke for about 35 minutes before taking questions for another half hour on the sidelines of the meetings this weekend of the International Monetary Fund and World Bank. The lecture was hosted by the Per Jacobsson Foundation.
Greenspan also said that the August surge in the cost of credit after a jump in U.S. mortgage defaults was an “accident waiting to happen,” given that investors were pricing risk too low.
“Something had to give,” he said. “Had the crisis not been trigged by subprime mortgages it would have erupted in another sector or market.”
SuperSiv Fund
Greenspan, 81, was critical last week of a plan by some of the U.S.’s biggest banks to help revive the asset-backed commercial paper market, which seized up because of investor concern that too much of the paper was backed by securities containing subprime loans.
Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. announced a plan last week to raise money for a so-called SuperSiv that would buy assets from distressed structured investment vehicles.
Investor uncertainty about the value of complex assets held by the vehicles has damped willingness to lend to the funds in the commercial paper market, stoking concern they’ll have to dump holdings at fire-sale prices.
U.S. Treasury Secretary Henry Paulson, the former head of Goldman Sachs Group Inc., helped broker the agreement.
In an interview with Emerging Markets magazine published on Oct. 19, Greenspan was quoted as saying that he was unsure “the benefits” of the plan “exceed the risks.”
`Best Assets’
Paulson assembled a group of reporters later that day to discuss the SIV rescue, emphasizing that the initiative was led by banks, that he had consulted the Fed and other regulators as the deal was put together, and that he was confident the initiative would work.
“The concept is not to buy bad assets or assets that have credit problems,” Paulson said after hosting a meeting of Group of Seven finance ministers and central bank governors.
Investors will buy “assets that aren’t credit-impaired and don’t have credit issues — the very best assets,” Paulson said. “That will accelerate the return of liquidity to parts of this market.”
Today, Greenspan questioned whether there was any longer a market for such “peculiar” assets.
While he praised “innovation” in securitized markets as “positive,” he noted that demand for sales of debt backed by subprime mortgages has dried up.
`Peculiar Financial Structures’
“These peculiar financial structures that have become very prominent in the past four or five years are about to disappear from the scene,” Greenspan said, citing “various variations” of collateralized debt obligations and “special” investment vehicles as examples.
“They have been tried and they have failed,” Greenspan said. “The failure is the basic way that investors have been misled as to what the value of these products is.”
The former Fed chief said central banks also increasingly appeared to have “lost control” of market interest rates beyond three to five years of maturity.
Much of the speech was dedicated to explaining why he doesn’t view the U.S. current-account deficit with “undue concern.”
The current-account gap, a measure of trade that includes investment flows, is now about 5.5 percent of U.S. gross domestic product, compared with 6.75 percent in 2005.
A reduction in “home bias” by international investors has channeled more money to the U.S., helping the country to finance its current-account deficit, Greenspan said.
He said he may become more concerned about the trade gap if “the pernicious drift toward” U.S. government budget deficits “isn’t arrested and compounded by protectionist reversal of globalization.”
Such a reversal would deal a “major blow to world economic prosperity,” he said.
To contact the reporters on this story: Kevin Carmichael in Washington at [email protected]
Last Updated: October 21, 2007 21:02 EDT
