UPDATE 3-Crisis was "accident waiting to happen"-Greenspan

WASHINGTON, Oct 21 (Reuters) - An unusually high degree of risk-taking across asset classes made recent financial market turmoil all but inevitable, former Federal Reserve Chairman Alan Greenspan said on Sunday.

"The financial crisis that erupted on August 9th was an accident waiting to happen," Greenspan said in a speech on the sidelines of the International Monetary Fund and World Bank meetings. "Credit spreads across all global asset classes had become suppressed to clearly unsustainable levels."

"Something had to give."

"If the crisis had not been triggered by a mispricing of securitized U.S. subprime mortgages, it would eventually have erupted in some other sector or market," Greenspan said.

Greenspan himself has drawn some criticism for cutting U.S. benchmark interest rates to 1 percent in 2003 and holding them there for a prolonged stretch, which some say helped inflate the U.S. housing bubble. But the former Fed chief said it was low long-term interest rates set in financial markets that pushed down mortgage costs and encouraged home buying.

"Central banks around the world have essentially lost control over the markets beyond maybe three or four or five years out. In other words, there is no evidence that we at the Fed had the capability of affecting mortgage interest rates," he said, noting that even when the U.S. central bank began raising rates in 2004, mortgage rates remained low.

Defaults on subprime loans, made to borrowers with poor credit records, have spiked in recent months, setting off a chain reaction that has tightened credit conditions around the globe. That, in turn, has raised worries about the U.S. economy that have sent the value of the U.S. dollar tumbling.

The weaker dollar is helping to rein in a large U.S. trade deficit by lending support to U.S. exporters, who are finding their goods more competitive in overseas markets.

NO UNDUE ALARM

Some economists have been concerned that a large U.S. trade shortfall could lead to a sharp and economically harmful drop in the value of the dollar.

Greenspan, who stepped down from the Fed early last year, said apprehension about the size of the shortfall in the U.S. current account, the broadest trade measure, was not groundless. However, he said would not view the unwinding of the deficit with "undue alarm," unless protectionist trade pressures and budgetary red ink continued to grow.

"If the pernicious drift toward fiscal instability is not arrested and is compounded by a protectionist reversal of globalization, the current account adjustment process could be quite painful for the United States and our trading partners," he warned.

The U.S. current account gap swelled to more than 6 percent of gross domestic product last year, leaving the United States heavily reliant on foreign capital to finance that deficit.

"At some point, foreign investors will balk at increasing their share of dollar-denominated assets in the portfolios they hold," he said, adding the recent dollar decline is an indication that America may be nearing that point.

Some economists worry the growing role of state-controlled investment funds may increase fears in the United States about the potential takeover of strategic U.S. assets.

These sovereign wealth funds are thought to have some $2.5 trillion at their disposal, with much of that under the control of trade surplus countries, such as China, Russia and the Middle East oil exporters.

Greenspan said the wealth funds may be disappointed by the level of return they receive on investments, and he said he suspected they would "fade eventually".

Still, he said Western countries were justifiably worried that the funds may base investment decisions on political rather than economic motives, and said such actions could destabilize financial systems. (Additional reporting by Steven C. Johnson and Lesley Wroughton)