Greenspan Says Recession May Come

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Greenspan Says Recession Still Possible After Fed Cut

By Steve Matthews and Albert R. Hunt

Sept. 20 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said the odds of a recession remain “somewhat more” than one in three even after this week’s cut in interest rates, with home prices likely to drop further and hurt consumer spending.

While lower rates may have reduced the chance of a recession, “remember, we still have a problem out there, which is a large overhang of unsold newly constructed homes,” Greenspan said in an interview today following the publication of his book, “The Age of Turbulence.” Home prices “are down only about 3 percent but they are clearly moving lower.”

The Fed on Sept. 18 lowered its benchmark rate by half a percentage point, saying tougher credit standards had the potential to hurt economic growth. Economists said this week’s action was similar to Greenspan’s approach in taking preemptive measures to reduce the risks of recession.

“To the extent we see a flattening out of the net worth of households, we would expect to find some erosion in consumer expenditures, but we haven’t seen it yet,” Greenspan said.

Greenspan, who in March estimated there was a “one-third probability” of a U.S. recession this year, said home values are “very important” to the economy because they contribute to household wealth and support borrowing to finance consumer spending. Prices are unlikely to drop more than 10 percent, he said.

Inflation Pressures

The former Fed chairman said in an earlier interview on the 60 Minutes program that he had more flexibility to lower rates as chairman than his successor Ben S. Bernanke does, because inflationary pressures today are a greater threat.

The Fed’s Open Market Committee cut the federal funds rate, which banks charge each other for overnight loans, a half point to 4.75 percent, a bigger reduction than expected by most of the 134 forecasters in a Bloomberg News survey. The Fed said in its statement that it “will act as needed to foster price stability and sustainable economic growth.”

Greenspan helped guide the longest economic expansion in U.S. history, lasting from 1991 to 2001. Growth averaged a 3 percent annualized rate during the former Fed chief’s tenure.

Greenspan, 81, served as Fed chairman from 1987 until his retirement in January 2006. Before that, he was a private economist in New York, advising many of the biggest U.S. companies.

Wary of Regulation

Greenspan reiterated he was wary of the Fed taking part in regulating the mortgage market, adding “I don’t know the answer” of whether it is proper for the current Fed to increase regulation of the market.

“But I would say it is fundamentally a job for state attorneys general,” he added, citing fraud as a particular problem. “I think what you need is experts in criminal acts.”

After the 2001 recession, the Greenspan Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with Greenspan’s hands-off approach to regulation, have brought him under fire. Critics say they helped inflate a housing bubble, creating conditions for the subprime mortgage crisis that threatens to sink the broader economy.

Former Fed Governor Edward Gramlich, who died earlier this month, had pushed Greenspan to strengthen oversight of banks during the record U.S. mortgage boom from 2004 to 2006.

Bernanke has promised to draft new rules to regulate mortgage lending practices and testified today before the House Financial Services Committee on the home-loan market and President George W. Bush’s plan to ease foreclosures. The central bank has historically favored refraining from dictating rules, focusing instead on disclosure and education so borrowers can make their own informed decisions.

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