America is “in the midst of a once in a century credit tsunami”, a former US Federal Reserve chairman said today.
Alan Greenspan warned that a “significant rise” in unemployment was unavoidable as the United States works its way through a massive financial crisis that will not ease up for many months.
The former chairman of the US central bank also told the oversight committee of the US House of Representatives that he had made a “mistake” in believing that banks, in operating in their self-interest, would be sufficient to protect their shareholders and the equity in their institutions.
``We are in the midst of a once in a century credit tsunami,'' Mr Greenspan said.
He added he realised his “mistake” when he found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works”.
As head of the Fed from 1987 to 2006, Mr Greenspan presided over much of the excess lending and expansion of the subprime mortgage market in the US that prompted the current economic crisis.
His comments were part of a series of hearings held by the US Congress in the past weeks, grilling financial executives and regulators in an effort to get to the heart of the credit crisis and what legislation will be needed to prevent a similar collapse in future.
The drop in housing prices, which precipitated the crisis and sparked a record number of home foreclosures, 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, Mr Greenspan said.
He also backed the $700bn (€545bn) rescue package, which allows the US government to invest public money in banks to free up credit.
Yesterday, the Dow Jones industrial average of blue chip firms dropped more than 650 points as worries about the economy continued.