Greenspan: U.S. Moving Closer to Recession

But considering all the negatives, economy is not as bad as it could be.

February 9, 2009, 9:36 AM

Dec. 16, 2007 -- Former Federal Reserve chairman Alan Greenspan said this morning that even though it seems more and more probable that the United States is headed into a recession, what is remarkable is that the likelihood of a recession is not already higher.

"The probabilities of a recession have moved up to close to 50 percent -- whether it's above or below is really extraordinarily difficult to tell. I think that's correct," he said in an exclusive "This Week" interview with George Stephanopoulos.

"The real story is, with the extraordinary credit problems we're confronting, why the probabilities are not 60 percent or 70 percent," he said.

Greenspan also noted that the economy is beginning to show warning signs of "stagflation" -- a possibility he alluded to in his latest book, "The Age of Turbulence" -- when slow growth, rising unemployment and inflation all strike at the same time.

"Because of the tremendous geopolitical shifts that occurred at the end of the Cold War, we've had a period of remarkable disinflation," he said. "That period is now coming to an end, and the evidence is clearly there in rising export prices coming out of China. It's showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not 'stagflation,' but the early symptoms of it."

The Federal Reserve has the power to counter these negative forces on the economy, but must be free to act, Greenspan said.

"One of the lessons of the last 20 years especially is that low inflation is the major contributor to economic growth overall, and that fundamentally, inflation must be suppressed," he said. "It's ultimately the Federal Reserve in this country which is the key architect of doing that, and it's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period."

On the housing crisis, Greenspan suggested that increased cash from the government for homeowners facing the mortgage crunch-- whether in the form of a tax break or other financial help -- could alleviate the stress of the situation without affecting mortgage rates.

"I don't know if it would work, but it would certainly help people -- it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on," he said.

"It's very critical that this thing reach a selling climax -- if I may put it in other words, exhaust itself," Greenspan said. "It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony."

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