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Greenspan On Recession, Stagflation, And Rescuing Homeowners

This morning, former Federal Reserve Chairman Alan Greenspan appeared on the ABC program “This Week” and talked with host George Stephanopoulos about the risks of recession and stagflation, and what could be done, if anything, to prevent more homeowners from losing their residences.

On the probability of an economic recession in the United States:

Well, that the probabilities of a recession have moved up to close to 50 percent — whether it’s above or below is really extraordinarily difficult to tell. I think that’s correct.

On the prospects for stagflation in the U.S.:

Well, I’m most concerned about it… and the evidence is clearly there in rising export prices coming out of China. It’s coming out — it’s showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not stagflation, but the early symptoms of it.

The former head of the Federal Reserve also discussed the current housing crisis in the United States, the problems associated with subprime and other classes of mortgages, and foreclosures:

Greenspan: There are going to be significant losses [on Subprime and Alt-A mortgages]. And there are loss ranges, now — the minimum, now, is $200 billion. But it’s easy, by some calculations, to get to $400 billion.

Stephanopoulos: The political world is now looking at the immediate pain. And Senator Clinton looks — has called for a freeze on foreclosures. Senator Edwards called for a rescue fund to be set up by the government for people who are facing these kind of foreclosures. What do you think about those ideas?

Greenspan: It’s important to help those people without affecting the mortgage rates and without affecting the structure of markets. Cash [from the government] is available and we should use that in larger amounts.

… It’s far less damaging to the economy to create a short term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.

Stephanopoulos: But by infusing cash, it sounds like you agree, then, with former Treasury secretary Larry Summers, who says that, right now, given this crisis, there has to be a bias toward activism.

Greenspan: It depends what you mean by activism. If you mean doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.

The Financial Times (UK) noted afterwards that Alan Greenspan’s remarks about supporting the use of public cash to help struggling U.S. homeowners would likely “fuel growing political pressure for a more radical response to the housing crisis.”