updated 10/2/2007 10:29:33 AM ET 2007-10-02T14:29:33

Former Federal Reserve chairman Alan Greenspan defended the U.S. subprime mortgage market, arguing that the securitization of home loans for people with poor credit — not the loans themselves — were to blame for the current global credit crisis.

Major Market Indices

Greenspan also warned that the longer term effects on the economy were still being determined, but said there were some early signs of an easing in the crisis.

“For example, the yields on what has been the poster child of this crisis, asset backed commercial paper, have jumped up sharply,” he said. “It has since come down, but not all the way.”

Similarly, the interbank lending rate, which jumped in recent weeks amid fears about insolvencies, have started to come down, but “not all the way,” Greenspan said Monday during a public talk in London to promote his new book.

“We are not through with this yet,” he added, suggesting there could still be what he termed an “Act II,” in which falling house prices feed into slower consumer spending.

However, he reiterated earlier comments that he believed the probability of a recession in the United States was “less than 50/50.”

Greenspan also implicitly criticized the role of ratings agencies in the crisis.

“The problem was that people took that as a triple-A because ratings agencies said so,” he said. Yet when they tried to sell the products they ran into difficulties, which shook confidence.

“What we saw was a 180 degree swing from euphoria to fear and what we’ve learned over the generations is that fear is a very formidable challenge,” Greenspan said.

Ratings agencies such as Standard & Poor’s Corp., Moody’s Investors Service Inc. and Fitch Ratings have come under fire for being slow to lower their ratings on securities based on mortgage loans to U.S. borrowers with poor credit records.

Greenspan defended the role of central banks and market regulators, claiming they do not have the resources to deal with criminal or illegal acts.

“We are not skilled enough in these areas and we shouldn’t be expected to,” he said. “It should be with the states’ attorney general and, frankly, it should be beefed up a considerable amount from where it is at this stage,” he said.

He said, however, that there remains a place in the market for borrowers without stellar credit.

“Subprime mortgages were and are risky, but they are worth it,” Greenspan said, adding that is better to have a larger property owning class with a vested interest in the system.

“I’m terribly concerned that we would cut back on the availability of subprime that has enabled a very significant increase in mortgages among minorities in the United States,” he added.

The current credit market turmoil began with rising defaults in the United States on subprime mortgages. Those problems have since spread as banks repackaged risky loans with the more reliable and sold them to a wide range of investors, including several European banks.

Credit dried up in early August, roiling financial markets, as banks became wary of exposure to the risky loans.

Greenspan acknowledged that a number of people should not have been taking out those mortgages, but that the current crisis was due “not the subprime problem itself, but to the securitization of subprime.”

Without that, there would have been significantly fewer defaults, he said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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