(SAN FRANCISCO) 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,’ Mr Greenspan told a group of energy-industry executives 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’.
Mr 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.
Fed chairman Ben S Bernanke, Mr Greenspan’s successor, acknowledged ‘downside’ risks to the expansion on Thursday, while telling lawmakers he expects growth to pick up later this year. He reiterated the central bank is prepared to take ‘timely’ action to aid the economy as needed.
‘While we are at stall speed in the US at the moment, we haven’t yet seen the discontinuity that characterises a recession,’ Mr Greenspan said during a question-and-answer session on Thursday.
‘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. Consumer spending has been slowed by falling home values, which leaves homeowners with less capital to borrow against, Mr Greenspan said.
‘Home prices will continue to weaken,’ the 81-year-old former Fed chief said. ‘When a bubble breaks, you go into primordial fear.’ The former chairman, a Republican, gave a nod toward Republican presidential candidate John McCain, comparing him with ex-president Ronald Reagan.
‘John McCain has the same roots as Reagan, being a Goldwater Republican.’
Source: Bloomberg (Business Times 16 Feb 08)