September 17, 2007 / 5:00 AM / 12 years ago

Greenspan says U.S. not headed for recession: report

WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan said on Monday the United States appears set to weather the bursting of a housing bubble without falling into recession.

A foreclosure sign in front of a home in Perris, California May 2, 2007. Former Federal Reserve Chairman Alan Greenspan said on Monday the United States appears set to weather the bursting of a housing bubble without falling into recession. REUTERS/Mark Avery

“The evidence so far, is not yet. The economy at this stage, despite this fiscal problem, despite the financial problem, is still holding up,” he told NBC’s “Today” program.

Greenspan is granting numerous interviews to publicize the release of his memoir.

His comments come a day before the U.S. central bank holds its policy-setting meeting. The Fed is widely expected to lower benchmark federal funds interest rates, now at 5.25 percent, by at least a quarter-percentage point to help the economy weather a housing downturn and a credit crunch.

Greenspan said he expects more mortgage delinquencies and home foreclosures in store in U.S. and global housing markets.

“I think we’re going to have to go through this adjustment, as indeed all the other countries are in the process of going through it. There are going to be a lot of people who will have very tragic stories,” he said.

But in a separate interview with CNBC Television, he warned that the Fed has to be careful to avoid stoking inflation with any future policy moves.

“It’s very clear that the trade-offs between inflation and growth have altered,” he said. “The Fed has to be more careful about inflation now than it did when I was chairman.”

Greenspan, in an interview in the Dutch newspaper NRC Handelsblad on Monday, warned inflation will rise to about 5 percent in Europe and the United States.

“The normal inflation level is closer to 5 percent than the current 2 percent,” Greenspan said, adding that the 5 percent level fitted an economy with a “paper” standard where the currency is not linked to gold.

Some economists and investors have criticized Greenspan for slashing interest rates too much in past financial crises, including ones sparked by Russia’s 1998 debt default and the bursting of the technology bubble in 2000-2001.

Greenspan told CNBC the Fed tried to raise mortgage rates in 2004 to weigh against an emerging housing bubble but was unsuccessful.

Indeed, long-term interest rates actually moved lower in the early stages of a Fed tightening cycle that began in mid-2004.

Greenspan stepped down as head of the Fed in January 2006 after more than 18 years at the helm of the U.S. central bank. His book is called “The Age of Turbulence: Adventures in a New World.”

The memoir has already drawn attention for the comment the Iraq war is “largely about oil.” He said on Monday his comments should not be seen as questioning President George W. Bush’s emphasis on Saddam Hussein’s arsenal as the justification for invading.

“I’m not saying that they believed it was about oil. I’m saying, it is about oil and that I believe it was necessary to get Saddam out,” he said.

He has also come under fire for writing he was surprised that his support of tax cuts early in the Bush administration would be embraced, but his simultaneous recommendation of fiscal restraint was ignored.

“I thought that the structure of the tax cut was fine, but that it had to be paid for,” he said.

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Greenspan, 81, also denied that he held back criticism of the administration’s fiscal policies while he was Fed chairman.

“People just weren’t listening to what I was saying,” he said. “I went through testimony after testimony with glassy-eyed congressmen and senators out there.”

Additional reporting by Steven C. Johnson in New York

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