Excerpts of Reuters interview with Greenspan

WASHINGTON (Reuters) - Excerpts from a Reuters interview with former Federal Reserve Chairman Alan Greenspan on Monday:

IMPACT OF HOUSE PRICE DECLINES ON RECESSION RISKS:

"If indeed we do get a double-digit decline, which I think is a possibility, but not a probability, then indeed I would say that pressure on consumption expenditures, largely from a weakened wealth effect, would eventually bring the relatively modest growth rate now from a small positive to a negative.

"Earlier in the year, I was talking about a one-third probability of a recession, and it's come up somewhat, but it's still at this stage less than 50."

RISKS TO OUTLOOK:

"The greatest risk is indeed in the house price issue, because we have a very large overhang of essentially completed, unsold new homes which are deteriorating and which the builders will increasingly try to press on the marketplace, and that tends obviously to put pressure on prices.

"If we end up with, say, a 5 percent decline in prices, and a significant decline in housing starts which enables builders to clean out their inventories fairly quickly, then we're in fairly good shape. But if the whole thing festers, it will erode household balance sheets and eventually impact on what the critical support has been in this economy, consumer expenditures."

RISKS OF INFLATION IN CURRENT SITUATION:

"I don't expect an inflation surge. I just think we're bottoming out on the disinflationary pressures.

"As disinflation itself eases, inflation of necessity is picking up. And what that does is it alters the type of balance between unemployment and inflation, and it's going to make monetary policy a lot more difficult than it was during most of the time that I was chairman."

ON HIS COMMENTS ABOUT ADJUSTABLE RATE MORTGAGES:

"The context in which I was discussing adjustable rate was reporting on a staff study the Fed staff had made which indicated that the costs of maintaining a 30-year mortgage relative to adjustable rate (mortgages) over the previous year or two was exceptionably high, and that a number of borrowers who do not expect to be living in a house for two or three or four years would probably be far better off taking out an adjustable rate mortgage.

"Obviously if rates go up, that is a risk that the homeowners will be taking. But what I was talking about in those terms was not subprime, I was talking about conforming mortgages.

"A week later ... I got a question that asked, do you really think that adjustable rate mortgages are better than the fixed rate? And I said, no that was not the point I was making. I was discussing a very narrow set of circumstances, and I said, indeed, the times I've taken out mortgages, I've taken out a fixed rate mortgage, because I think the insurance that you get, while the price may be high, is worth it.

"Even more important is that -- everyone says I pushed the adjustable rate mortgage -- well if in fact I had, somebody who took out an adjustable rate mortgage and refinanced 18 months later would have made a profit, because the mortgage rate didn't move. Incidentally, there's been no trouble to speak of in adjustable rate mortgages in the conforming sector -- it's wholly in the subprime markets."

ON FED EASING DURING 2001-2003 COMPARED WITH THE PRESENT:

"During (the earlier period), global forces ... were persistently pushing global long-term interest rates progressively lower, and this is across both developing and developed countries.

"I and indeed all of the central banks were confronted with inflation expectations declining, long-term interest rates declining and therefore, the issue of the trade-off was very clearly one which is dramatically different from what it is today.

"We could ease without fear of stoking inflationary pressures. ... We couldn't do that in today's environment.

"Not that there's an immediate surge in inflation, but you can see in unit labor costs in the United States and cost pressures around the world, especially, for example, in the export prices coming out of China. ... What we are having now is the early signs of a turn. My argument basically is that the Federal Reserve, indeed no central bank, has the leeway to move rates lower as we did at the Fed without raising potential longer-term difficulties."

ON WHETHER GOVERNMENT-SPONSORED MORTGAGE ENTERPRISES' ROLES

SHOULD BE EXPANDED TO HELP STABILIZE HOUSING MARKETS:

"What could the GSEs do at this stage? Well, the only thing they can do under their current rules and enablements is to issue debentures and buy conforming mortgages. In other words, they are not allowed to be involved in either jumbos or in subprimes. Conforming mortgages are doing very well.

"Unless they went out as private organizations and bought into these risky subprimes and built them up, there is nothing that they do which would help resolve the subprime or the Alt-A or the jumbo problems."

ON REGULATION AND STRUCTURED FINANCE VEHICLES:

"The asset-backed commercial paper market has been growing very rapidly in recent years. It was only when the rupture in the markets occurred that a number of holders began to realize that part of the asset holdings that were being financed by 30-day paper were subprime, but they didn't look, or were not as aware as they should have been at the time of making the purchases.

"Now they're becoming aware, and in a sense the regulations are no longer required because there's been a big fall-off in issuance of asset-backed commercial paper, and now people are scrutinizing in very great detail what is in fact in special investment vehicles of this type. They are looking at what the details are, and they've curtailed a lot of stuff which they figured was weak credit.

"The market effectively has done the regulation at this stage, which means the level of asset-backed commercial paper is going to be lower for a while. It may never in fact get back up to where we were, for all I know.

"But in markets such as we have where we try new products all the time, some of them are too obscure, too convoluted. And indeed, a lot of the (collateralized debt obligations), which are wholly illiquid and get priced by modeling, are probably going to just disappear from the markets because nobody trusts them anymore -- why they trusted them in the first place has got to do with the huge euphoria of the huge amount of liquidity that was in the world economy.

"But we're going to find that, for example, credit default swaps, which have been doing exceptionally well, will continue to move higher. Collateral debt obligations will continue, but not with this sort of crazy super-tranche mezzanine-equity type of structure which has invisible components.

"It's the purchasers of these vehicles who are backing off and who are in effect forcing the regulatory adjustment to occur."