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CNBC Exclusive: CNBC's Maria Bartiromo Sits Down with Former Fed Chairman Alan Greenspan and Managing Director of Pimco Paul McCulley on CNBC's "Closing Bell" (Transcript Included)

Jennifer Dauble
Friday, 1 Aug 2008 | 9:17 PM ET

WHEN: Thursday, July 31, 2008 at 3PM ET
WHERE: CNBC's "Closing Bell"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Former Fed Chairman Alan Greenspan and Managing Director of PIMCO Paul McCulley on CNBC's "Closing Bell."

All references must be sourced to CNBC.

BARTIROMO: WELCOME BACK THE DYNAMICS OF THE US ECONOMY FORCING A NEW WAY OF THINKING ON BOTH ON WALL STREET AND IN WASHINGTON OUR SPECIAL GUEST IS NO STRANGER TO WEATHERING ECONOMIC STORMS AS AN 18 YR VETERAN OF THE FEDERAL RESERVE. HE IS THE NOTED AUTHOR OF THE NEW YORK TIMES BEST SELLING BOOK THE AGE OF TURBULENCE ADVENTURES IN A NEW WORLD AND HE IS HERE WITH US IN A CNBC EXCLUSIVE WELCOME ALAN GREENSPAN TO THE CLOSING BELL. ALONG WITH PAUL MCCULLEY MANAGING DIRECTOR & PORTFOLIO MANAGER OF PIMCO. GENTLEMAN NICE TO HAVE YOU ON THE PROGRAM. DR GREENSPAN THANKS SO MUCH FOR JOINING US AGAIN. WELCOME. PAUL YOU WERE ON SQUAWK BOX THIS MORNING SO YOU'VE GOT AN INTERESTING TAKE ON WHAT YOU HEARD THERE AND BRINGING TO OUR AUDIENCE HERE. LETS KICK IT OFF WITH WHERE WE ARE DR GREENSPAN. THE GDP FIGURES OUT TODAY WHAT WAS YOUR REACTION TO THE GROWTH AND ONE YEAR AFTER THIS FINANCIAL UPSET HOW WOULD YOU CHARACTERIZE THINGS?

Alan Greenspan
Lauren Victoria Burke
Alan Greenspan

GREENSPAN: WELL I THINK THE BIG SURPRISE AT THE MOMENT IS THE EXTRAORDINARY PRESSURES COMING FROM THE FINANCIALS THAT THE AMERICAN ECONOMY HOLDING UP RATHER WELL ACTUALLY. INDEED IF YOU LOOK AT THE GLOBAL CONTEXT IT IS EVEN MORE IMPRESSIVE. ONE PF THE REASONS OF COURSE IS THE FACT THAT WHEN THE CRISIS BEGAN JUST ABOUT A YEAR AGO THE NONFINANCIAL CORPORATE SECTOR WAS IN EXCEPTIONALLY GOOD SHAPE BALANCE SHEETS WERE SUCH THAT BORROWING REQUIREMENTS WERE MINIMAL AND INDEED THEY WEATHERED VERY SIGNIFICANTLY MUCH OF WHAT HAS CREATED A HUGE PROBLEM IN THE FINANCIAL SYSTEM AND ONLY RECENTLY IT IS BEGINNING TO FEEL THE PRESSURES. THE PROBLEM UNFORTUNATELY IS THAT THE FINANCIALS HAS GONE A WHOLE YEAR NOW WE HAVE HAD HUGE AMOUNTS OF LIQUIDITY GENDERED BY CENTRAL BANKS AND IT IS GETTING INCREASINGLY EVIDENT THIS IS A ONCE IN A CENTURY TYPE OF PHENOMENON. IT IS NOT THE STANDARD LIQUIDITY CRISIS THAT WE HAVE SEEN IN THE PAST ITS VERGING ON THE ISSUE OF SOLVENCY AND THE REASON WE KNOW THIS IS BASICALLY WHEN THE FOR EXAMPLE IN BRITAIN WHEN NORTHERN ROCK WAS BAILED OUT WITH SOLVERN CREDIT THAT THE SYSTEM STABILIZED AND WE WERE IN VERY HAD A VERY MAJOR PROBLEM PRIOR TO THE BEAR STEARNS BUYOUT BUT ONCE SOLVERN CREDIT WAS SUBSTITUTED FOR THEIR CREDIT THAT TOO STABILIZES. BUT ITS VERY CLEAR FROM THE SPREADS THAT WE SEE AND FOR EXAMPLE LIBOR AND CREDIT DEFAULT SWAPS FOR THE FINANCIALS THAT WE HAVE NOT GOTTEN CLOSURE YET AND IT IS GOING TO TAKE A WHILE AND I THINK PAUL KNOWS BETTER THAN I HAVING HEARD ME SO OFTEN ON THIS ISSUE IT'S ESSENTIALLY FUNDAMENTALLY THE PRICE OF HOMES IN THE UNITED STATES, WHICH ARE OF COURSE DETERMINING WHAT THE EQUITY IS IN HOMES HERE. AND THEREFORE, WHAT THE ULTIMATE COLLATERAL OF THE MORTGAGE-BACKED SECURITIES IS PRETTY MUCH AROUND THE WORLD. AND WE'RE STILL NOWHERE NEAR THE BOTTOM OF THE HOME PRICING, AND WE ARE LOOKING FOR THAT AS THE CRITICAL STATISTIC WHICH WILL CREATE A BALANCE FUNDAMENTALLY IN THE ECONOMY. AND UNTIL THEN I HOPE WE CAN GET SUFFICIENTLY STABLE STOCK PRICE BECAUSE THERE IS THE FUNDAMENTAL SOURCE OF CAPITAL FROM WHICH WE GET THE ABILITY TO RECAPITALIZE A GOODLY PART OF THE FINANCIAL SYSTEM, WHICH SURELY NEEDS IT.

BARTIROMO: AND THAT'S BUILT ON CONFIDENCE. PAUL?

MCCULLEY; WELL, WE ALL FOCUS ON THE RECAPITALIZATION GOING ON IN THE FINANCIAL SYSTEM AND THE NEED FOR EQUITY THERE. BUT THE REAL ISSUE IS THAT'S JUST A VEIL ON THE DIMINISHING EQUITY IN THE HOUSING STOCK IN AMERICA.AND THAT'S THE REAL UNDERLYING FUNDAMENTAL, IS HOW MUCH EQUITY DO WE HAVE IN HOUSES? UNTIL WE KNOW THAT, THERE'S A QUESTION MARK ABOUT THE SANCTITYOF THE MORTGAGE-BACKED SECURITIES AND THEREFORE HOW MUCH EQUITY DO WE HAVE IN THE LEVERED-UP INTERMEDIARIES. SO ALAN AND I SPEND A LOT OF TIME TRACING IT BACK TO THE ORIGINAL SOURCE. IN FACT, YOU'VE BEEN DOING A HUGE AMOUNT OF STATISTICAL WORK ON THAT RECENTLY.WHAT'S YOUR BOTTOM LINE ON WHEREWE STAND ON HOW MUCH WE'VE DIMINISHED THAT EQUITY IN THE HOME AS OPPOSED TO THE FINANCIALSYSTEM?

GREENSPAN: WELL, IT'S QUITE SIGNIFICANT. THE CRITICAL STATISTIC, ACTUALLY, FROM THE POINT OF VIEW OF FORECLOSURES AND THE LIKE IS THE NUMBER OF HOMEOWNERS WHO HAVE NEGATIVE EQUITY IN HOMES. I MEAN, THE ISSUE OF MORE LOAN RELATIVE TO MARKET VALUE.

MCCULLEY: WE CALL THAT UPSIDE DOWN IN CALIFORNIA.

GREENSPAN: CALIFORNIA'S -- DOES ITS OWN THING. WHAT IS -- AT THE MOMENT, AS BEST I CAN JUDGE, WE HAVE ABOUT 12 MILLION HOMEOWNERS WHO ARE BASICALLY NET IN THE RED.AND IT TURNS OUT, AND THIS IS THE MOST INTERESTING STATISTIC IF YOU'RE FORECASTING FORECLOSURES, THAT DURING THE RISE IN THIS PARTICULAR STATISTIC FROM A VERY SMALL AMOUNT OF PEOPLE WITH A NEGATIVE MORTGAGE -- NEGATIVE POSITION IN HOUSING, IT'S NOW RISEN VERY SIGNIFICANTLY. BUT ESSENTIALLY, FORECLOSURES, QUARTER BY QUARTER, TAKE ONLY ABOUT 15% OF THAT.IN OTHER WORDS, 85% OF HOMEOWNERS ARE IN THEIR HOMES. THEY BASICALLY PAY THEIR DEBT SERVICE, THEY INTEND TO LIVE THERE. AND SO I FIND YOU CAN'T REALLY FORECAST FORECLOSURES LOOKING ATTHE DELINQUENCIES.THERE'S NO LEAD TIME.

BARTIROMO: IT'S AN IMPORTANT DISTINCTION, ACTUALLY, TO MAKE, BECAUSE OVERALL WHEN YOU LOOK ATIT THAT WAY, THE 85%, YOU FEEL LIKE OKAY, IT'S NOT AS TERRIBLE AS SOME OF THE HEADLINES. LET ME ASK YOU ABOUT SOMETHING YOU SAID THE LAST TIME WE WERE TOGETHER.YOU SAID THERE WAS A OTHER 50 CHANCE OF REEDITION RECESSION. HAS THAT CHANGED?

GREENSPAN: STRANGELY, NO. I THINK THE DATA AT THIS STAGE IN THE UNITED STATES ARE NOT, ASWAS STATED THIS MORNING ON A LOTOF PEOPLE DISCUSSING THE GDP FIGURES ARE SUGGESTING RECESSION. ACTUALLY, I THINK WE'RE PROBABLY LIKELY TO GO THERE.WE'RE RIGHT ON THE BRINK. AND I WOULD BE MORE SURPRISED IFWE DIDN'T THAN IF WE DID GIVEN THE FINANCIAL STATE. BUT THE DATA SHOW, FOR EXAMPLE, IN THE SECOND QUARTER THIS EXTRAORDINARY DECLINE IN INVENTORIES. AND WHEN YOU SUPPRESS THE LEVEL OF GDP BECAUSE YOU HAVE VERY LARGE INVENTORY LIQUIDATION --

BARTIROMO: RIGHT.

GREENSPAN: NOT BAD.

BARTIROMO: WAS THAT BECAUSE THE STORES WERE SELLING THINGS AND GETTING RID OF THE INVENTORY OR COMPANIES WEREN'T BUYING ANYTHING AND FILLING UP THE INVENTORY?

GREENSPAN: NO, I THINK IF YOU LOOK AT THE DATA ON A MONTH-BY-MONTH BASIS YOU BEGIN TO SEE THAT THE INVENTORY SALES RATIOS HAVE BEEN COMING DOWN, OF COURSE, FOR YEARS BECAUSE OF TECHNOLOGY.THE JUST IN TIME PROCESS. AND IT'S STILL GOING ON EXCEPTIONALLY CLEARLY. AND WHEN YOU LOOK AT THE DATA, FOR EXAMPLE, FROM THE PURCHASINGMANAGERS, WHICH HAVE A VERY INTERESTING STATISTIC, WHICH IS HOW DO THEY VIEW THE INVENTORY POSITION OF THEIR COMPANY FORWARD OF THEIR PLANS? IN OTHER WORDS, WHAT IS THEIR CUSTOMER'S POSITION? AND THAT'S BEEN MOVING UP OR DOWN, BUT IT'S NEVER GOTTEN TO THE POINT WHERE WE SENSE THERE'S A GLUT OUT THERE.SO INVENTORY CONTROLS ARE QUITE GOOD. AND AT THIS STAGE I THINK THEY ARE THE MAJOR REASON WHY IN THE VERY SHORT TERM WHILE WE'RE FENDING OFF RECESSIONARY PRESSURES BUT THERE'S NO GETTINGAROUND IT, YOU LOOK AT THE INITIAL CLAIMS TODAY, YOU LOOK AT NUMBERS OF FIGURES, AND MOST IMPORTANTLY THE REST OF THE WORLD GROWTH RATE IS SLOWING DOWN, AND WE DEPEND VERY CRITICALLY ON THAT, AND THAT'S WHY I AM MORE INCLINED TOWARD THE RECESSION SIDE THAN NOT FOR THE U.S.

MCCULLEY: ONE OF THE THINGS IN THE SECOND QUARTER WAS THE INVENTOR DRAW ON THE MOTOR VEHICLE SIDE, AND AS WE KNOW AS THAT QUARTER PROGRESSED SALES CAME DOWN AND THEY LEFT THE QUARTER A WHOLE LOT LOWER THAN THEY ENTERED THE QUARTER, AND IT DOESN'T LOOK LIKE SALES ARE COMING BACK.SO EVEN THOUGH YOU GOT A BIG DRAW ON INVENTORIES IN THE SECOND QUARTER THERE'S NO REASON BASED ON FORWARD SALES OF AUTOMOBILES TO GET ENTHUSIASTIC. PARTICULARLY SINCE YOU'VE SEEN THE CREDIT CRUNCH MOVE INTO THE LEASING MARKET IN AUTOMOBILES.I'M NOT OPTIMISTIC ON AUTOMOBILES. I ASSUME YOU'RE NOT EITHER?

GREENSPAN: WE'RE GOING TO KNOW WHAT THE FIGURES WERE FOR JULY VERY SHORTLY. THE EARLY DISCUSSIONS ON IT, IT WILL BE ROUGHLY UNCHANGED.

BARTIROMO: AND WE KNOW WHAT MAY AND JUNEDID, AND IT WAS OBVIOUSLY VERY TROUBLING AND A REAL SHIFT.WE'RE GOING TO SLIP IN A SHORT BREAK, ACTUALLY.WE WILL CONTINUE OUR CONVERSATION IN A MOMENT.MUCH MORE WITH FORMER FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN AND PAUL McCULLEY, GETTING THEIR TAKE ON THE CURRENT ECONOMIC CLIMATE AND THE FINANCIAL SYSTEM.

CARUSO-CABRERA: LET'S GET OVER TO MARIA, WHO'S IN WASHINGTON WITH ALAN GREENSPAN.

BARTIROMO: THANKS VERY MUCH, MICHELLE.I AM WITH FORMER FEDERAL RESERVECHAIRMAN ALAN GREENSPAN ALONG WITH PAUL McCULLEY, MANAGING DIRECTOR AT PIMCO, ALSO PORTFOLIO MANAGER AT PIMCO.LET'S GET BACK TO THE STORY OF THE BROAD ECONOMY. TWO ISSUES GOING ON, THE SLOW ECONOMY AS WELL AS THE FINANCIAL SECTOR. AND THE FINANCIAL SYSTEM IN GENERAL, WHICH CERTAINLY IS I WOULD SAY THE MOST IMPORTANT DISCUSSION OF OUR TIME, RIGHT? LET ME GET YOUR TAKE ON WHAT'S GOING ON RIGHT NOW WITH REGARD TO FANNIE AND FREDDIE. WE HAD HANK PAULSON ON THIS PROGRAM LAST WEEK AS HE WAS IN THE MIDST OF ASKING CONGRESS TO PASS HIS LEGISLATION.LISTEN TO WHAT HE HAD TO SAY.

PAULSON ON TAPE: OUR POSITION IS LET'S REMOVE THOSE CONCERNS. LET'S GET AUTHORITY FROM THE GOVERNMENT, TEMPORARY AUTHORITY FROM CONGRESS TO -- WHERE THE MARKET KNOWS AND THESE INSTITUTIONS KNOW THAT IF NECESSARY THE TREASURY IS PREPARED TO PUT IN CAPITAL. AND AGAIN, THIS WOULD BE AT OUR DISCRETION AND WITH THE CONSENT OF THE INSTITUTIONS.

BARTIROMO: TREASURY PUTTING IN CAPITAL. HANK PAULSON WANTS AN UNLIMITED AMOUNT OF CAPITAL AT TREASURY'S DISCRETION. IS THIS A BLANK CHECK? IS THERE A DOWN SIDE TO THIS?WHAT ARE YOUR THOUGHTS, DR. GREENSPAN?

GREENSPAN: WELL, I'VE ALWAYS ARGUED FOR -- AND I'VE MADE INNUMERABLE SPEECHES ON THIS SUBJECT. BUT THE MODEL THAT WAS CONSTRUCTED BY FANNIE AND FREDDIE IS AN UNSTABLE STRUCTURE THAT YES YOU CAN PUT CAPITAL IN IT AND SUPPORT IT AND FEECTIVE SECRETARY PAULSON HAD NO CHOICE. IF THEY DIDN'T SUPPORT FANNIE AND FREDDIE AT THE TIME THEY DID, OR MADE THE STATEMENTS THATTHEY DID, THERE WAS A VERY MAJOR DANGER OF UNRAVELING. BUT WE SHOULD REMEMBER HOW WE GOT HERE AND NOT LET IT HAPPEN AGAIN.MY OWN VIEW IS I DON'T KNOW WHETHER PUTTING IN CAPITAL IS GOING TO BE ADEQUATE. I THINK THE SOLUTION HERE ULTIMATELY IS GOING TO BE ULTIMATELY, ONE, A NATIONALIZATION OF BOTH FANNIE AND FREDDIE. AND I HOPE A RESTRUCTURING IN NATIONALIZATION MORE CAPITAL COMING FROM TAXPAYER MONEY.AND THEN SPLIT THEM UP INTO FIVE OR TEN SEPARATE ENTITIES AND SELL THEM BACK IN THE MARKET.YOU CANNOT HAVE A TYPE OF ORGANIZATION WHICH IS HALF PUBLIC, HALF PRIVATE. ESSENTIALLY, THE PROFIT TURNS OUT TO BE FOR THE PRIVATE SECTOR AND THE LOSSES ARE SOCIALIZED. THAT IS NOT CAPITALISM.THAT IS NOT THE WAY OUR SYSTEM FUNCTIONS. AND FANNIE AND FREDDIE ARE A MAJOR ACCIDENT WAITING TO HAPPEN. AN ARGUMENT I'VE BEEN MAKING FORYEARS. AND WHAT THEY NEED IS A VERY MAJOR INCREASE IN COMPETITIVE CAPABILITIES AND CAPITAL, AND THE ONLY WAY IS TO ARRANGE FOR IT ULTIMATELY THAT THEY NO LONGER HAVE THE IMPLICIT SUBSIDY, WHICH LEGALLY THEY DON'T HAVE, BUT NOBODY BELIEVES IT AND WITH BEAR STEARNS THE NOTION THAT SOMEHOW THEY WEREN'T -- FANNIE AND FREDDIE WERE NOT BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT BECAME A SHAM.

BARTIROMO: I'M GOING TO GET YOUR TAKE ON THIS IN A MINUTE AS WELL, BUT THE WHOLE IDEA OF A BACKSTOP AND PUTTING THIS LENDER OF LAST RESORT IN PLACE FOR BEAR, FOR FANNIE AND FREDDIE, I'M NOT GOING TO ASK YOU HOW WE GOT HEREAND -- YOU'VE ANSWERED THOSE QUESTIONS A MILLION TIMES AND YOU WROTE AN OP-ED ON IT.BUT WHAT I WOULD LOVE TO DO IS TAKE YOU ON A HYPOTHETICAL TRIP BACK TO THE FED.I'M NOT ASKING YOU TO COMMENT ONBEN BERNANKE.I KNOW YOU'RE NOT GOING TO DO THAT, AND I DON'T WANT TO. I'M NOT INTERESTED IN IT.BUT LET'S HYPOTHETICALLY SAY YOU'RE CHAIRMAN OF THE FED, YOU'RE THERE DURING THAT WEEKEND, BEAR STEARNS IS ON THE BRINK, YOU'RE FIELDING ALL THESEEMERGENCY CALLS. WHAT DO YOU DO? DO YOU DO THE BACKSTOP?

GREENSPAN: YOU HAVE TO DO THE BACKSTOP BECAUSE ONCE YOU GET TO THAT POINT YOUR PARTICULAR CHOICES ARE VERY LIMITED. THE CRITICAL ISSUE HERE WHICH I'M UNCOMFORTABLE WITH IS THAT IS A FISCAL POLICY OPERATION, ESSENTIALLY SOMETHING WHICH SHOULD BE SET UP IN THE TREASURY DEPARTMENT. IN OTHER WORDS, WE HAD A RESOLUTION TRUST CORPORATION WHICH ACTUALLY WORKED REASONABLY WELL. I'M RECOMMENDING EFFECTIVELY THAT WE OUGHT TO HAVE A STANDBY GROUP OF EX OFFICIO OFFICERS OF A LITTLE ORGANIZATION WHICH WOULD PERIODICALLY SORT OF HOLD THE SECRETARY OF THE TREASURY, CHAIRMAN OF THE FED, AND DECIDE WHETHER A PARTICULAR INSTITUTION WAS AT THE EDGE AND COULD CREATE MAJOR SYSTEMIC RISK IF IT WAS ALLOWED TO LIQUIDATE QUICKLY, AT WHICH POINT A STATUTE WOULD BE INITIATED IN WHICH THAT PARTICULAR INSTITUTION WOULD EITHER BE TAKEN INTO A CONSERVATORSHIP OR RECEIVERSHIP ESSENTIALLY RESTRUCTURED, AS WAS DONE WITH THE RESOLUTION TRUST CORPORATION, AND THEN BASICALLY LIQUIDATED OR SOLD BACK INTO THEPUBLIC.WHAT WE SHOULD NOT DO IS HAVE THE CENTRAL BANK INVOLVED IN ITS BALANCE SHEET BECAUSE THAT BALANCE SHEET IS THE CREATOR OF THE MONETARY BASE AND IF YOU ALLOW MAJOR FLUCTUATIONS IN THATAS A RESULT OF OTHER THAN MONETARY POLICY REASONS I THINK YOU'RE TAKING UNDUE RISK WITH THE NOTION OF THE STABILITY OF THE FINANCIAL SYSTEM AND VERY SPECIFICALLY THE FED'S CONTROL OF INFLATION.

BARTIROMO: YOU KNOW, IT'S VERY INTERESTING WHAT YOU SAY, BECAUSE THIS IS THE DEBATE I MEAN, DO WE NEED A CHANGING REGULATORY ENVIRONMENT GIVING MORE POWER TO THE FED TO BE OVERSEEING THESE INVESTMENT BANKS?

MCCULLEY: YOU'VE GOT TWO ISSUES HERE. WHAT TYPE OF REGULATIONS YOU HAVE.AND THEN THE OTHER ISSUE IS IF YOU'RE GOING TO HAVE DO BACKSTOPS OR BAILOUTS AND BACKSTOP IS NOTHING MORE THAN A PRE-EMPTIVE BAILOUT, IF YOU'RE GOING TO DO THAT THAT SHOULD BE UNDER THE FISCAL POLICY MANTLE BECAUSE IT IS A FISCAL POLICY OPERATION.YOU MAY NEED TO HAVE THE FED BEING THE VEHICLE IN THE VERY SHORT RUN. BUT ALAN AND I COULDN'T AGREE MORE THAT WE HAVE A SEPARATION OF MONETARY AND FISCAL POLICY IN THIS COUNTRY AND THE FED SHOULDN'T BE IN THE FISCAL POLICY BUSINESS.THAT'S CONGRESS'S BUSINESS.

BARTIROMO: RIGHt AND YOU KNOW, PAUL VOLCKER WAS ALSO VERY VOCAL ABOUT THIS IDEATHAT THE FED SHOULD BE GETTING OUT OF THE WAY.AND YOU HAVE LONG SAID, I MEAN, THIS COULD BE APPLES AND ORANGES, BUT YOU HAVE LONG SAID THAT THE FED SHOULD NOT BE IN THE BUSINESS OF CRACKINGBUBBLES. RIGHT? AND THE FED IS VERY MUCH RIGHT NOW FOCUSED ON THIS HOUSING CRISIS AND FANNIE AND FREDDIE AND THIS BACKSTOP. ARE WE MISSING ANOTHER ASSET BUBBLE CREATED RIGHT NOW IN TERMS OF INFLATION AND COMMODITIES?

GREENSPAN: WELL, I THINK THE COMMODITY ISSUE IS SOMEWHAT DIFFERENT.THERE ARE LONG-TERM STRUCTURAL PROBLEMS IN THE OIL MARKET, WHICH IS THE BIG DOMINANT ELEMENT IN THE COMMODITIES THING. LARGELY BECAUSE OF THE FACT THAT THERE'S A TREND WHICH IS VERY DIFFICULT TO PROJECT, NAMELY THAT UNDERLYING CONSUMPTION, WHILE RISING AS MUCH AS OIL IN THE GROUND, THE RESERVES OF OIL,IS RUNNING FAR IN EXCESS OF THE RATE OF INCREASE IN THE PRODUCTIVE CRUDE OIL CAPACITY BECAUSE WE'RE NOT INVESTING ENOUGH TO TAKE THE OIL OUT OF THE GROUND AND TO ESSENTIALLY CREATE A SUFFICIENTLY LARGE FLOW TO BALANCE THE DEMAND THAT'S COMING MAINLY FROM ASIA. THE PROBLEM THAT WE HAVE HERE IS THAT BECAUSE THERE HAS BEEN THIS PRESSURE THE BUFFER IS GRADUALLY DISAPPEARING BETWEEN SUPPLY AND DEMAND, THERE'S BEEN UNDERLYING PRESSURE ON PRICES, WHICH STARTING IN 2004 CAUGHT THE EYE OF THE FINANCIAL SYSTEM, AND IF YOU LOOK AT THE DATA THAT THE BANK OF INTERNATIONAL SETTLEMENTS PUBLISHES ESSENTIALLY ON THE EMOTIONAL VALUE OF BASICALLY CRUDE OIL FUTURES, IT'S GOING FLAT AND THEN IT JUST GOES STRAIGHT UP.WHAT THAT MEANS IS THAT WE ARE MOVING FORWARD, A PRICE INCREASE WHICH IS GOING TO HAPPEN ANYWAY, AND I THINK THIS IS INDEED SPECULATION, BUT IT'S GOOD SPECULATION IN THAT BY CREATING PRICES MOVING FORWARD MORE QUICKLY THAN THEY WOULD HAVE YOU ESSENTIALLY CURB THE LEVEL OF CONSUMPTION FAR SOONER, AND THEREFORE THE PEAK OF PRICES, WHICH WILL ULTIMATELY GET TO WITHOUT THE SPECULATION IS CUT OFF.

BARTIROMO: SO WHAT'S THE BIGGEST CHALLENGE FOR THE U.S. ECONOMY TODAY? IS IT A SLOWDOWN IN THE ECONOMY AND GLOBAL GROWTH?IS IT INFLATION BECAUSE OF WHEREOIL AND COMMODITIES ARE? OR IS IT THE FINANCIAL SYSTEM'S STABILITY?

GREENSPAN: I THINK THAT, FIRST OF ALL, IT'S IMPORTANT THAT WE FOCUS ON STABILIZING THE FINANCIAL SYSTEM, WHICH REQUIRES THAT WE STRUCTURE IT IN SUCH A MANNER THAT PRICES OF HOMES GET DOWN, STABILIZED, THAT THE EQUITY IN HOMES STABILIZES, THAT THE MARKETS STABILIZE. BUT THEN WE ARE CONFRONTED WITH A VERY SIGNIFICANT CHANGE IN THE BALANCE BETWEEN GROWTH AND INFLATION, WHICH IS A LONGER-TERM TREND AND ONE WHICH I BELIEVE WE WERE WITNESSING THE FAVORABLE PART OF IT -- IN OTHER WORDS, WHEN I WAS AT THE FED, INFLATION RELATIVE TO GROWTH WAS COMING DOWN. WE HAD A STRUCTURAL DECLINE IN INFLATION LARGELY BECAUSE ECONOMIC AND POLITICAL EVENTS THAT OCCURRED WITH THE END OF THE COLD WAR. BUT THAT EVIDENTLY BOTTOMED IN THE SPRING OF 2007, AND IT'S COMING BACK.WE WILL COME OUT OF THE FINANCIAL CRISIS, BUT WE STILL HAVE TO CONFRONT THAT PROBLEM OFA CHANGING BALANCE BETWEEN GROWTH AND INFLATION, OR WHAT WELIKE TO CALL STAGFLATION.

BARTIROMO: DO WE NEED A SECOND STIMULUS PACKAGE?

GREENSPAN: I DON'T WANT TO COMMENT ON THAT.I DON'T THINK THAT THAT ADDRESSES THE BROADER ISSUE.WHETHER WE DO OR WE DON'T IS A SHORT-TERM QUESTION, AND I DON'T THINK IT HAS LONG-TERM CARRY.AND THEN OF COURSE WE'VE GOT OUR BUDGET DEFICIT, WHICH IS CREATING REAL CONCERNS IN THE MARKETPLACE.

BARTIROMO: BUT JUST TO BE CLEAR AS WE WRAP UP HERE, YOU DON'T THINK THAT THE FED SHOULD BE GIVEN MORE POWER IN TERMS OF OVERSEEING THE INVESTMENT BANKS?

GREENSPAN: I THINK -- WELL, THE INVESTMENT BANKS ARE A DIFFEREN ISSUE.INVESTMENT BANKS AND COMMERCIAL BANKS ARE GRADUALLY AND INCREASINGLY MORPHING INTO THE SAME SORT OF VEHICLE.AND I'VE NEVER BEEN MUCH CONCERNED ABOUT THE FEDERAL RESERVE LENDING TO INVESTMENT BANKS. WHAT I AM CONCERNED ABOUT IS BASICALLY THE FED BEING GIVEN THE ROLE TO OVERSEE THE FINANCIAL STABILITY SYSTEM. I DON'T THINK ANYONE CAN DO THAT, AND I'M MOST WORRIED THAT WERE THE FED TO TAKE THAT JOB ON AND FAIL, AS EVERYONE ELSE HAS AND WILL, YOU CANNOT ANTICIPATE THE FUTURE. I THINK IT UNDERMINES THE CREDIBILITY OF THE CENTRAL BANKING SYSTEM.

BARTIROMO: ALL RIGHT.WE WILL LEAVE IT THERE, GENTLEMEN, THANK YOU FOR BEING ON THE PROGRAM.DR. GREENSPAN.PAUL McCULLEY.WE APPRECIATE YOUR TIME.




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