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US at the edge of a recession, says Greenspan

VANCOUVER – THE United States is drawing close to a recession, with the odds at 50 per cent or possibly higher, former Federal Reserve chairman Alan Greenspan said on Thursday.

‘The odds have definitely moved up from a year ago, when I was talking of about a third,’ Mr Greenspan told a financial audience.

‘I think we are now at a point that we are at the edge or over,’ he added. ‘The probability of a recession is 50 per cent, maybe more, but we are not there yet.’

Mr Greenspan’s comments were similar to those he made earlier in the month, and he acknowledged it was very difficult to predict exactly when the economy might enter a recession or was actually in one.

The former Fed chairman said a lesson learned from previous downturns in the economy and financial markets, such as after the Sept 11, 2001 attacks, was the need to avoid protectionist trade policies.

‘The economy is exceedingly more resilient than in the past,’ Mr Greenspan said, when asked if he thought if a recession would be shallow or deep, adding later that ‘for that reason, I would argue for a relatively shallow recession’.

On the issue of sub-prime mortgages, which were at the heart of the current economic turmoil, Mr Greenspan said although the loans were risky, he believed that they were worth the risk as they helped broaden home ownership.

The ‘real big surprise’ to him was how the sub-prime crisis migrated across borders to other parts of the world because of securitisation – where the mortgages were bundled together for sale through complex financial instruments.

Mr Greenspan gave a cautious thumbs up to recent injections by sovereign wealth funds of billions of dollars in exchange for stakes in a number of US banks hard-hit by the sub-prime crisis.

‘I must admit I am a little uncomfortable with sovereign wealth funds, but I must admit there is very little evidence that they are being used inappropriately,’ Mr Greenspan said. ‘On balance, I think they are desirable”, he added.

China, Kuwait and Singapore are among the foreign governments that have pumped money into US companies in recent weeks.

 

Source: REUTERS (The Straits Times 26 Jan 08)

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