CNBC News Releases

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

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

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 --