Greenspan Speaks Out on U.S. Economy

Former Federal Reserve chairman, Alan Greenspan has echoed the sentiments of Warren Buffet, by saying the United States was still more likely than not to have a recession despite relative stabilization in the economy in recent weeks.

"I still believe there is a greater than 50 percent probability of recession although that probability has receded a little and I think the probability of a severe recession has come down markedly," the former chairman told the Financial Times.

He did point out that it was "too soon to tell" whether the worst of the financial crisis was over as this would depend on what happened to house prices.

Mr. Greenspan estimates that house prices will fall by another 10 percent from their February levels for a total peak-to-trough decline of roughly 25 per cent.

"If the economy was weak and the market overshot, house prices could decline by another 5 percent, "he said.

"Such house price declines imply a major contraction in the level of equity in owner-occupied homes, the ultimate collateral for mortgage backed securities," Greenspan added. Mr. Greenspan said it was still not clear whether big financial institutions had taken all the writedowns they would need to take on higher rated tranches of mortgage backed credit products.

Greenspan said he believed there was a "tug of war" taking place in the economy, with financial sector stress pulling one way and strong corporate liquidity pulling the other. Corporate liquidity is being eroded, but only gradually.

"No one knows how this tug of war will end - specifically, whether the financial crisis will end before it drags down the real economy."

Greenspan sees the main risks to this being the household savings rate moving up more rapidly than most analysts expect as home equity falls, the labor market weakens and access to credit declines.