Tue, Sep 18, 2007 - Page 12 News List

Greenspan sees trouble ahead

GRIM OUTLOOK The former US Fed Reserve chairman says that the probability of a US recession now stands at more than 33 percent, with big price declines following

AGENCIES , LONDON, NEW YORK AND WASHINGTON

The fall in US house prices triggered by the subprime credit crisis will likely be bigger than expected, former US Federal Reserve chairman Alan Greenspan warned in an interview published yesterday.

The drop in property prices "is going to be larger than most people expect," Greenspan told the Financial Times, adding that he would not be surprised if the percentage decline in the US ended up being "in double digits."

House prices nationally were probably already down by 2 percent or 3 percent from their peak, he said, warning that it would be difficult to predict the exact scale of the decline.

Greenspan said that the probability of a US recession was now slightly more than a third, after he earlier in the year put the chances at one-third, the Wall Street Journal reported in its online edition yesterday.

Greenspan said there was a "very large" inventory of unsold, newly built homes putting pressure on builders to sell them quickly, the WSJ reported, citing an interview with him.

As a result, "we have the capability of far bigger price declines," which will pinch home equity, lead to more defaults on subprime mortgages and pressure consumer spending, the WSJ quoted Greenspan as saying.

Greenspan, who stepped down as chairman of the Fed in January last year after more than 18 years at the helm of the US central bank, is giving interviews to promote his memoir, The Age of Turbulence: Adventures in a New World, released yesterday.

In his interview with the Financial Times, Greenspan also said the current turmoil on financial markets was "an accident waiting to happen" and said the price of risk had dropped to unsustainably low levels.

In a separate interview with the Daily Telegraph, he said: "History does not deal well with protracted periods of narrow yield spreads, which is another way of saying people are taking on inordinately large risks.

"I frankly was surprised that it took from the fall of 2005 to the fall of 2007 for that to unwind."

Greenspan said that many of the current problems stemmed from the fact that banks have been selling packages of debt to investors globally in recent years.

He also described the subprime market -- in which banks lend money to customers with poor credit histories and which has been at the eye of the recent credit storm -- as the "weak link" in the US system.

"[Subprime] wouldn't have been an economic problem at all if we didn't scrutinize this stuff and sneak it out of the country," he told the Telegraph. "If we had gotten past that and we hadn't broken the overall fever, it would have been something different, but it would have happened one way or the other."

In interviews published on Sunday, Greenspan said his successors at the US central bank should be cautious about cutting interest rates because of inflation risks.

Greenspan said the Fed should be careful not to cut rates too aggressively because the risk of an "inflationary resurgence" is greater now than when he was chairman, the Financial Times reported.

The US central bank will meet tomorrow and is widely expected to cut benchmark federal funds rate -- currently at 5.25 percent -- by at least a quarter of 1 percent age point to help the economy weather a housing downturn and a credit crunch.

The Fed is currently weighing the adverse impacts of the housing downturn on the broader economy after a recent report showing employers shed 4,000 jobs last month raised warning flags.

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