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Greenspan says economy on the edge of recession
Former Federal Reserve Chairman Alan Greenspan said the US economy is on the verge of its first recession in six years as falling home values hurt consumer spending.
- Bloomberg
- Published: 23:10 February 15, 2008
Washington: Former Federal Reserve Chairman Alan Greenspan said the US economy is on the verge of its first recession in six years as falling home values hurt consumer spending.
"We are clearly on the edge," Greenspan told a group of energy-industry executives on Thursday at the Cambridge Energy Research Associates' 27th annual CERAWeek conference in Houston. He reiterated comments from last month that the odds of an economic contraction are "50 per cent or better."
Greenspan's view has evolved from a year ago, when he saw a one-in-three chance of a recession, citing slowing profit growth and becoming one of the first economists to warn of the risk. Now, Wall Street firms including Merrill Lynch & Co. and Goldman Sachs Group Inc. are forecasting a contraction in the aftermath of the worst housing downturn in a quarter century.
Greenspan said during a question-and-answer session, "American business was in such extra-good shape before this problem hit. Otherwise we would be talking about how long and how deep. We are not there yet."
The lack of available credit "hasn't been a major problem yet for American business," he added.
Among consumers, though, spending has been slowed by falling home values, which leaves homeowners with less capital to borrow against, he said.
"Home prices will continue to weaken," the 81-year-old former Fed chief said. "When a bubble breaks, you go to primordial fear."
Separately, the former chairman, a Republican, gave a nod toward Republican presidential candidate John McCain, comparing him with ex-President Ronald Reagan. He made the remarks after his predecessor at the Fed's helm, Paul Volcker, last month endorsed Democratic candidate Barack Obama, the Illinois senator.
"John McCain has the same roots as Reagan, being a Goldwater Republican," Greenspan said. McCain, like the late Barry Goldwater, is a senator from Arizona. McCain "is a conservative and has many of the same characteristics that Reagan did."
Forecast
Economists predict econ-omic growth will slow to a 0.5 per cent pace in the first quarter from the annualised rate of 0.6 per cent recorded in the previous three months, according to a Bloomberg News survey this month.
Traders anticipate the Fed will cut the benchmark interest rate by half a point, to 2.5 per cent, by March 18, after 2.25 percentage points of reductions since September. Last month, policy makers reduced rates by 1.25 percentage point, the fastest easing of monetary policy in two decades.
Some Fed officials, such as Dallas Fed President Richard Fisher and Philadelphia Fed chief Charles Plosser, warned that the central bank must also monitor inflation as it lowers rates. Fisher said this month that rate cuts can have the potential to "juice up inflation."
Faster inflation, combined with slower growth, is a condition known as stagflation, which throttled the US economy in the 1970s.
"Stagflation is too strong a term for what we are on the edge of," Greenspan said on Friday. "I trust we have enough sense to come up with policies to avoid that."
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