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February 17, 2008

Greenspan: Economy "on the edge" of a recession

Former Federal Reserve Chairman Alan Greenspan said the U.S. 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," 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 percent or better".

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, 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 characterizes recession," 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. Among consumers, though, spending has been slowed by falling home values, which leaves homeowners with less capital to borrow against, Greenspan said.

"Home prices will continue to weaken," the 81-year-old former Fed chief said. "When a bubble breaks, you go to primordial fear."

Economists predict economic growth will slow to a 0.5 percent pace in the first quarter from the annualized rate of 0.6 percent recorded in the previous three months, according to a Bloomberg News survey this month.

Traders anticipate the Fed will cut the benchmark interest rate by half a point, to 2.5 percent, by March 18, after 2.25 percentage points of reductions since September. Last month, policymakers reduced rates by 1.25 percentage point, the fastest easing of monetary policy in two decades.

Some Fed officials, such as Dallas Fed President Richard Fisher and Philadelphia Fed chief Charles Plosser, warned that the central bank must also monitor inflation as it lowers rates. Fisher said this month that rate cuts can have the potential to "juice up inflation".

Faster inflation, combined with slower growth, is a condition known as stagflation, which throttled the U.S. economy in the 1970s.

"Stagflation is too strong a term for what we are on the edge of," Greenspan said. "I trust we have enough sense to come up with policies to avoid that."

He also told the group of energy-industry executives that a mandatory cap on carbon emissions "will lead to lower levels of economic activity and significantly higher unemployment".

Greenspan left the Fed in January 2006 after almost two decades at the helm. He has returned to his role as a private economic forecaster, speaking at conferences and to groups of bankers and investors, while consulting for clients such as Deutsche Bank AG.

Courtesy Xinhua

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