Greenspan sees U.S. economic toll from credit crunch

NEW YORK (Reuters) - The credit crunch that has troubled financial markets in recent months will eventually take its toll on the U.S. economy, former Federal Reserve Chairman Alan Greenspan said on Wednesday.

Greenspan, who many now blame for inflating the housing bubble during his tenure, said home prices would almost certainly fall and that the slump will eventually prompt consumers to cut back spending.

"When you get house prices flattening out, you begin to get pressures on consumption," Greenspan told the World Business Forum at New York's Radio City Hall.

He added that rising stock prices, which pushed major indexes to a record this week, could help offset the drop in the value of home equity.

Greenspan has been an active commentator on the economy since leaving the Fed in early 2006. His pronouncements have roiled financial markets at times, though the frequency of his recent appearances have diluted their impact.

His record has also come under attack, with some critics lambasting him for inflating asset bubbles and undermining fiscal discipline in Washington. Greenspan has defended his policies, saying global forces out of the central bank's control have dictated the path of long-term borrowing costs.

Greenspan said the rate of U.S. economic growth was slowing, but the odds of a recession were less than 50 percent.

Concern that a credit crunch and financial market disarray could hit the U.S. economy prompted the Fed to cut interest rates sharply last month, even though it was unclear how serious any damage could be.

ECONOMY OK, EXCEPT FOR HOUSING

In an interview on CNBC, Greenspan pronounced the overall U.S. economy in reasonably good shape, excluding the housing problems.

"The trouble, unfortunately, is that we are undergoing, what looks to me to be an inevitable significant decline in home prices, the result of the buildup of very large inventories of new homes," Greenspan said.

Asked whether the downturn was almost over, Greenspan said: "No. There's a great deal of uncertainty out there."

In a separate appearance, Greenspan said that demographic shifts will strain U.S. Medicare resources but that financing the Iraq war would have no long-term impact on those resources.

"We do not have the resources in any credible economic scenario to fulfill what is currently on the books as an entitlement 10, 15, 20 years from now," he said in an interview on Canadian Broadcasting Corp radio.

Greenspan said the cost of the U.S. war in Iraq would have no long-term impact on funding for Medicare, the health care financing program for the elderly. He said both political parties were afraid to confront the issue of Medicare's long-term solvency because of its political sensitivity.

He also said that not all of the Canadian dollar's rise to parity with the U.S. dollar was caused by U.S. dollar weakness.