The fate of the world economy hinges on what happens to house prices in America and that may not be a good thing, former Federal Reserve chairman Alan Greenspan said on Monday.
Speaking at the Reuters headquarters in London, the former Fed chair delivered a gloomy prognosis on the state of the global economy -- U.S. house prices are likely to fall further and they could drag the rest of the world with them.
"A weakened U.S. economy, especially weakened consumer markets, still has the capacity to impact on our trading partners," Greenspan said.
"To date the financial and economic spill-over is most visible in Europe... But only marginally so in developing Asia."
He added that Japan had taken a hit in the form of sales of its equities as sub-prime investors needed to raise cash.
Greenspan maintained the global economy was just as linked as ever, disagreeing that there had been a decoupling between the fate of the U.S. economy and that of the rest of the world.
"The critical variable in this judgment is the price of homes in the United States," said Greenspan, who ran the U.S. central bank for more than 18 years until he stepped down in 2006.
"I would expect home price declines to continue until the rate of inventory liquidation reaches its peak," Greenspan said, on stage with British Prime Minister Gordon Brown and finance minister Alistair Darling.
Financial markets everywhere are already reeling from the fallout from U.S. sub-prime lending -- loans to people with such bad credit history, they would not normally be eligible for a home loan.
As defaults have risen, a credit crunch has taken hold of global markets as banks worry about just how much bad debt each other is carrying following increasingly complex methods to package the dodgy mortgage debt over the last few years.
On Monday, U.S. banking giant Citigroup said it expected a 60% decline in net income in the third quarter because of weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments and increases in consumer credit costs.