LONDON (Reuters) - The probability of a recession in the United States has increased but is still less than 50/50, former Federal Reserve Chairman Alan Greenspan said in comments broadcast on Friday.
Greenspan said he expects consumer spending to slow as the housing market slowdown “significantly” reduces the ‘wealth effect’ but is still not convinced that will lead the world’s largest economy to contract.
“The danger of recession has obviously risen but in my judgment ... is still less than 50/50. It’s less optimistic than one would like,” Greenspan told BBC Radio 4.
The U.S. Federal Reserve slashed interest rates last week by 50 basis points to 4.75 percent in a bid to shield the economy from the fallout of the credit crisis that’s swept through financial markets in recent months.
The U.S. economy is shifting into a slower gear, in large part because of the sharp slowdown in the housing market. There are worries that a similar scenario could play out in Britain too.
But when asked if he expected a UK housing market crash, the former Fed chief said such a bleak outlook was premature.
“The probabilities have risen but I’m scarcely at the point where I’m forecasting (that) we’re about to experience significant recessions either in the United States or in Britain,” he said.
Still, he recognized that all asset bubbles, be they in residential housing, equity or real estate markets, will probably burst if you let them expand long enough.
Greenspan, himself often criticized for slashing interest rates too quickly in response to signs of financial or economic weakness, said central banks face a tough task in managing these bubbles resulting from the long-term trend of globalization and decline in real interest rates.
“It’s the consequence of ... a dramatic decline in real interest rates. It’s really not something which central banks any longer have control over.”
On the current financial market turmoil sparked by a collapse in the risky U.S. mortgage sector, Greenspan said he had little sympathy for the hedge fund community which was “presumably the largest culprit” behind it.
He wasn’t concerned at seeing these wealthy investors’ net worth dwindle, but argued that their role in greasing the wheels of the global financial system is still crucial and beneficial.
“The key aspect of finance is to create a movement of a nation’s savings into productive, physical assets which produce productivity,” he said.