‘Credit tsunami’ means job losses unavoidable: Ex-Fed chief

October 24th, 2008 - 2:05 am ICT by IANS  

Washington, Oct 24 (DPA) Former US Federal Reserve chairman Alan Greenspan warned Thursday that a “significant rise” in unemployment is unavoidable as the United States works through a massive financial crisis.Greenspan, who headed the US central bank from 1987 to 2006, also accepted some of the blame for the lax regulation during his tenure, which precipitated the credit freeze now gripping the country.

“We are in the midst of a once in a century credit tsunami,” Greenspan said in prepared remarks before the Oversight Committee of the US House of Representatives.

The housing market downturn at the heart of the credit crisis will not stabilise until “many months in the future,” he said. Only then will investors gripped by fear of a protracted recession in the US begin to significantly reinvest in the stock market.

“Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,” he said.

The former Fed chief backed the $700-billion rescue package, which allows the government to invest public money in banks to free up credit.

Greenspan presided over much of the excess lending and expansion of subprime mortgage market in the US that prompted the current financial turmoil. A sharp drop in home prices since 2006 sparked a record number of home foreclosures, led to billions of dollars in losses for financial institutions and caused banks to sharply curb their lending.

Grilled on his own role by House members, Greenspan admitted the crisis had exposed a “flaw” in his own free-market model that had appeared so successful over the last 30 years. He said he was “shocked” by the extent of the credit freeze that has gripped the country.

Greenspan’s testimony was part of a series of hearings held by Congress in the past weeks, challenging financial executives and regulators in an effort to get at the heart of the credit crisis and what legislation will be needed to prevent a similar collapse in future.

Christopher Cox, chairman of the Securities and Exchange Commission, and former Treasury secretary John Snow were also testifying Thursday.

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