One on One with Former Fed. Chair Alan Greenspan
Wednesday, October 10, 2007
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SUSIE GHARIB: Alan Greenspan reiterated today his concerns about the housing downturn and the impact it could have on the U.S. economy. This morning, I sat down with the former chairman of the Federal Reserve to talk about these issues and his new book, "The Age of Turbulence." Greenspan is no stranger to NIGHTLY BUSINESS REPORT. In fact, he was the first commentator on our program back in 1981 and appeared regularly to give his opinions on the economy. My first question to Greenspan today: what shape is the U.S. economy in right now?
ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: I would say excluding the problems we`re having in housing, it`s in reasonably good shape, better than most of the times I`ve dealt with it. The trouble, unfortunately, is we are undergoing what looks to me to be an inevitable significant decline in home prices, the result of the build-up of very large inventories of new homes which are twice the level of what they ordinarily would be.
GHARIB: Mr. Chairman, as you look at the housing market, do you think that the downturn is almost over?
GREENSPAN: No. There`s a great deal of uncertainty out there. We haven`t been through a marked decline in home prices of this order of magnitude in my economic awareness which goes back to 1948. But we`ll find out soon enough.
GHARIB: Everyone I talk to wants to know, is the worst of the credit crisis over? What do you think?
GREENSPAN: If you look at, say, double A or even single A corporate bond yields they`ve just been flat. They`re doing fine and the corporate sector is doing fine and obviously it`s in much better shape than it was five, seven, 10 years ago. But the presumption that they will go back to where they were on August 8 is unrealistic because what this process is doing is actually unwinding the very prolonged under pricing of risk so we`re getting different relationships.
GHARIB: Many analysts are saying that even though the Federal Reserve cut interest rates, banks are still very cautious about lending. What impact could that have on the economy?
GREENSPAN: It`s not a severe credit crunch. What it is is just higher rates and higher rates will bring slower expansion until they are absorbed and provided we don`t have other problems created as a consequence of the home price thing, we`re probably all right.
GHARIB: You said a few months ago that the odds of a recession were one in three. What do you think now?
GREENSPAN: I`d say that they`re obviously they`re higher than a third. I`m reasonably sure they`re less than 50-50 which means that odds are better than 50-50 that we`ll skirt a recession in this particular period.
GHARIB: What about high oil prices that are now like around $80 a barrel? Does that increase the chances of a recession?
GREENSPAN: Not in and of itself. Remember that there was a great deal of concern of what would happen to the U.S. economy and the world economy when crude oil prices got up to $50 a barrel. Nothing happened. We then said, well, $70. Nothing happened. Now we`re at $80 and it`s hard to find any real problems. Nonetheless it`s still an issue but nowhere near the issue it was 30, 40, 50 years ago.
GHARIB: You look at the American consumer, it`s really interesting that in the face of high oil prices, declining values in their homes that consumers continue to borrow and to spend. They are just amazingly resilient. Do you think that there is any chance that this trend will reverse itself?
GREENSPAN: If we get a decline in net worth as a percent of disposable income in households, the answer is yes. The critical point here is, one, home prices are going to go down. The market value of home assets are going to go down and it depends what happens to stock prices. Will stock prices offset that? Very recently they have. Will they continue to do so? It`s very tough to judge.
GHARIB: Looking at the Fed`s minutes from the September 18 policy meeting, it indicates that Fed officials don`t see inflation posing a threat to the economy. Do you agree with that?
GREENSPAN: It`s not going to be as easy as it was for the Federal Reserve when I was there because we didn`t have to worry about inflation very much. Ben Bernanke and his successors are going to be grappling with a lot more of a problem with inflation than during the 18.5 years that I was on the board. If you look at underlying unit costs, they are beginning to rise in the United States as they are elsewhere.
GHARIB: As you know, next week is the 20th anniversary of the crash of `87. You wrote about this extensively in your book. Looking to the future, in the future, what could trigger a sell-off of that magnitude?
GREENSPAN: Anything. The issue is once you get to the point where the speculative fever breaks, which it does on its own for internal purposes, what happens to be standing there at the point of the break, whether it be somebody making a speech, whether it is a weather change, whether it is some form of event, it will become the cause of the next decline. But the cause is essentially internal. It`s the internal dynamics of booms and busts or bubbles and bursts. It`s human nature. It`s not something which we can do very much about.
GHARIB: You`ve worked for so many American presidents. As you look at the candidates who are currently running for president, which ones -- and feel free to name more than one -- do you think will do the right thing for the U.S. economy?
GREENSPAN: None of them are properly addressing the issues that I`m concerned about and I trust that as the election gets closer, that these issues will become sufficiently large that what is basically a large degree of evasion by most of both the Democrats and the Republicans comes to an end. But if it doesn`t come to an end, reality will force it because the next president of the United States is going to have to deal with these problems presumably in the second term.
GHARIB: Mr. Chairman, thank you so much for your time and good luck with your book.
GREENSPAN: Thank you so much.
