Greenspan Says U.S. Economy Is `On the Edge' of a Recession

Greenspan Says U.S. Economy Is `On the Edge' of a Recession

By Vivien Lou Chen
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Feb. 15 (Bloomberg) -- 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 yesterday 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 yesterday, 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 U.S. at the moment, we haven't yet seen the discontinuity that characterizes recession,'' Greenspan said during a question-and-answer session yesterday. ``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.''

Credit Availability

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.''

Separately, the former chairman, a Republican, gave a nod toward Republican presidential candidate John McCain, comparing him with ex-President Ronald Reagan. He made the remarks after his predecessor at the Fed's helm, Paul Volcker, last month endorsed Democratic candidate Barack Obama, the Illinois senator.

``John McCain has the same roots as Reagan, being a Goldwater Republican,'' Greenspan said. McCain, like the late Barry Goldwater, is a senator from Arizona. McCain ``is a conservative and has many of the same characteristics that Reagan did.''

Bernanke, 54, told the Senate Banking Committee yesterday that Fed officials lowered their forecasts for growth after the U.S. lost jobs in January, and declining home and stock values threatened consumer spending.

Growth Forecast

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, policy makers 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.

No `Stagflation'

``Stagflation is too strong a term for what we are on the edge of,'' Greenspan said yesterday. ``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.

During a Jan. 24 speech in Vancouver, the former chairman said he's worried that an ``inevitable'' global recession will create a backlash that forces countries to retreat from world markets. He then put the probability of a U.S. recession at ``50 percent or more, but we're not there yet.''

In November, he told a Sao Paulo, Brazil, audience that the odds of a recession were less than 50 percent.