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Recession risk ‘due to mess left by Greenspan’

LONDON – MR JOSEPH Stiglitz, a Nobel-prize winning economist, said the United States economy risks tumbling into recession because of the sub-prime crisis and a ‘mess’ left by former Federal Reserve chairman Alan Greenspan.

‘I’m very pessimistic,’ Professor Stiglitz said in an interview in London yesterday. ‘Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages.’

Prof Stiglitz said there was a 50 per cent chance of a recession in the US, and that growth would slow to less than half its 3 per cent potential.

The comments add to criticism of Mr Greenspan’s 18 years in control of the US central bank. He stepped down in January last year.

After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 per cent. That move, along with a hands-off approach to regulation, have brought Mr Greenspan under fire, as the bursting of the housing bubble and the sub-prime mortgage crisis again threaten to sink the economy.

Mr Greenspan, 81, said on Nov 7 that he predicted a ‘less than 50:50’ probability of a US recession, reiterating previous remarks made late last month. Home prices in the world’s largest economy have not bottomed out, he said.

Prof Stiglitz, an author and professor of economics at Columbia University in New York, estimated that US consumers borrowed up to US$950 billion (S$1.38 trillion) last year against the value of their homes to finance spending.

‘That game is over,’ Prof Stiglitz said. ‘As house prices are going down, people are not going to be able to take more money. We are looking at a major slowdown. The impact of that is going to be a very major slowdown, maybe recession.’ He also faulted US President George W. Bush for cutting taxes in 2001 and, thus, widening the US’ budget deficit and allowing political support for free-market trading to wane.

 

Source: BLOOMBERG NEWS (The Straits Times 17 Nov 07)

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