Greenspan defends subprime role to Swedish bankers

Former Federal Reserve Chairman Alan Greenspan (R) talks with Sheri Cooper, chief economist for Bank of Montreal, during a talk to a financial audience in Vancouver, British Columbia January 24, 2008. (REUTERS/Andy Clark)

STOCKHOLM (Reuters) - Ex-Federal Reserve chief Alan Greenspan told a Stockholm audience on Friday he did not believe he had caused the U.S. subprime crisis and had warned of the risk in 2004, a person attending the event said.

The participant in the event held by Sweden's Handelsbanken <SHBa.ST>, which was closed to media, said Greenspan was reluctant to discuss last month's pair of aggressive interest-rate cuts by the Fed.

"He said he didn't want to talk about the Fed's policy today," the participant said.

"He said it is in the nature of the Fed to be more aggressive in cutting rates in a cyclical slowdown than in raising them when the economy is good."

The attendee said Greenspan deflected suggestions that the Fed, which cut rates to a four-decade low of 1 percent after the bursting of the dotcom bubble and the September 11, 2001 attacks on the United States, helped spark the crisis in the U.S. subprime market.

Banks all over the world have taken huge write-downs in the past few months, hit by a tide of mortgage defaults by borrowers unable to service their loans as U.S. interest rates rose.

"He (Greenspan) said that he didn't exacerbate the subprime crisis, instead he had called for caution in a speech in 2004," the participant said.

In a speech via satellite to a Chicago banking conference in May 2004, a little over a month before the Fed started raising rates from a rock-bottom 1 percent, Greenspan said mounting debt levels posed risks for some subprime borrowers, but not for broader U.S. households.

He said a surge in U.S. home purchases had driven up outstanding mortgage debt by 10 percent in the decade before 2004, but that the finances of those buying homes were not "materially impaired" by the trend.

"Thus, short of a period of overall economic weakness, households, with the exception of some highly leveraged subprime borrowers, do not appear to be faced with significant financial strain," Greenspan said in May 2004.

He said low interest rates had held down debt service costs for households.

"Even should interest rates rise materially further, the effect on household expenses will be stretched out because four-fifths of debt is fixed rate of varying maturities, and it will take time for debt to mature and reflect the higher rates," the Fed chief said in 2004.

The participant said Greenspan on Friday dismissed the "decoupling" theory advanced by some euro zone politicians in recent weeks that argues that alternative sources of demand and trade such as China and Russia mean the rest of the world can withstand a U.S. slowdown without pain.

(Reporting by Johan Sennero and Sarah Edmonds)