Greenspan Says Recession Still Likely in US: FT
Former Federal Reserve chairman Alan Greenspan was quoted on Tuesday as 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," Greenspan told the Financial Times in an interview published on the newspaper's website.
"(But) that probability has receded a little and I think the probability of a severe recession has come down markedly," said Greenspan.
He said 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.
The Financial Times said Greenspan estimated house prices would fall by another 10 percent from their February levels, for a total peak-to-trough decline of roughly 25 percent.
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," said Greenspan.
He 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 was 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," said Greenspan.
The Financial Times said the main risk that Greenspan saw was that the household savings rate would move up more rapidly than most analysts expected as home equity fell, the labor market weakened and access to credit declined.