Greenspan: Recession Chance 'Less than 50-50'

Alan Greenspan
Lauren Victoria Burke

The U.S. economy still faces pressure from a drawn-out housing-market slowdown but will "probably not" slip into recession as a result, former Federal Reserve Chairman Alan Greenspan said Tuesday.

In a broad-ranging question-and-answer session with M&A specialists at the ACG Capital Connection conference, Greenspan said chances of a recession are "less than 50-50."

Recession for U.S?
Recession for U.S?

Still, he said falling home values can create trouble for the economy, which leans heavily on consumer spending to power growth.

"Where the problem lies is in home prices .... A remarkably large amount of consumption expenditures has been financed out of gains in housing wealth," he said.

Greenspan said the rate of inventory reduction for the huge stockpiles of unsold new homes is still "very small," a factor that would tend to prolong the housing shakeout.

There is also a risk that default rates on subprime mortgages, or those held by borrowers with poor credit histories, could be higher than currently expected, he said.

Greenspan added global credit markets are still operating in a state of fear, as shown by wider than usual bid-offer spreads, two months after the costly shakeout that ended a long period of market prosperity.

"We probably won't get back to where we were under a state of euphoria. We're now under a state of fear. And it will take a while to work through that," Greenspan said.

The 81-year-old former Fed chief said he was skeptical that a multibillion dollar fund being assembled by top banks to prevent the dumping of bonds linked to U.S. subprime mortgages would solve rather than just prolong the credit shakeout.

It is "tricky" to say that the fund, called the Master Liquidity Enhancement Conduit and nicknamed the Super SIV, will be successful in narrowing credit spreads, he said.

"It is too soon to know what this group has in mind ... my normal inclination is skepticism," Greenspan said.

Asked about the recent creep in crude oil prices above $90 per barrel, a record high in non-inflation-adjusted terms, Greenspan said that over time, high prices could help cure the "addiction" to gasoline-powered vehicles and promote more efficient alternatives.

"People hate the idea of plug-in vehicles, but if you get the price of gasoline to $15 a gallon, they would love it," he quipped.

Greenspan scoffed at the ability of corn-based ethanol to displace large amounts of motor gasoline, saying the "political product" had more potential to drive up the costs of livestock feed by absorbing more of the U.S. corn crop.