Greenspan: Cutting Rates Won’t Solve Mortgage Crisis

In the Wall Street Journal‘s editorial page on December 12, Alan Greenspan sounds off about the current mortgage crisis [via]:

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own.

Greenspan’s explanation for how it happened begins in the Cold War and spans the globe. While it’s not easily summarized, the upshot is that our national economic outlook is no longer as easily controlled in the world market. Cash in China means risk-taking in the U.S., as the overall global economy swells.

…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 U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates.

Speaking more broadly about the credit crisis, Greenspan says it will end “when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end.” Other than noting that our economy seems hinged on our current housing market, there is no news here. As far as real estate investors are concerned, this reads: it will end when it ends.

Speaking of price deflation closer to home, here are some South Seattle homes that had price reductions this week:

Price: $425,000 $399,950
11248 14th Ave S
3 br/2 ba; sq footage not listed
MLS#: 27207720

Price: $449,900 $429,900 $399,999
5910 47th Ave S
4 br/2.5 ba; 1,950 sq ft
MLS#: 27198217

Price: $495,000 $539,000 $499,500
5016 30th Ave S
5 br/3 ba; 2,660 sq ft
MLS#: 27186449

Price: $458,000 $443,000 $425,000
3935 S Cloverdale St
4 br/3 ba;2,030 sq ft
MLS#: 27139735