Former Federal Reserve Chairman Alan Greenspan said the slowing economic recovery in the U.S. feelslike a “quasi-recession” and the economy might contract againif home prices decline.
“We’re in a pause in a recovery, a modest recovery, but apause in the modest recovery feels like a quasi-recession,”Greenspan said in an interview on NBC’s “Meet the Press.”
Asked if another economic contraction, a so-called “doubledip,” was possible, Greenspan said, “It is possible if homeprices go down. Home prices, as best we can judge, have reallyflattened out in the last year.”
Slowing economic growth, and a decline in housing activityfollowing the expiration of a government tax credit, have raisedfears that the economy could return to a recession beforecompleting its recovery from the worst downturn since the 1930s.
The former U.S. central bank chairman said that mosteconomists expect “a small dip” in home prices. The NationalAssociation of Realtors reported that the pace of home salesfell in June for a second month. Homes are selling at an annualrate of 5.37 million, and the group’s chief economist Lawrence Yun said transactions will be “very low” in coming months.
“If home prices stay stable, then I think we will skirtthe worst of the housing problem,” Greenspan said. “But rightunder this current price level, mainly 5, 7 or 8 percent below,is a very large block of mortgages, which are under water, so tospeak, or could be under water. And that would induce a majorincrease in foreclosures, foreclosures would feed on theweakness in prices, and it would create a problem.”
Home Prices
Home prices in 20 cities rose by 4.6 percent in May,according to a report from S&P/Case-Shiller last week. Becauseof the index’s lag in reporting, the extent to which home pricesmay slacken in June and July is not yet determined.
Greenspan’s successor, Ben S. Bernanke, told Congress lastmonth that the economic outlook is “unusually uncertain.”Bernanke and his colleagues on the Federal Open Market Committeewill meet Aug. 10 in Washington. Last week, the CommerceDepartment reported that the recovery slowed in the second halfof 2010. The economy grew at a 2.4 percent pace, followinggrowth of 3.7 percent in the first quarter.
“Our problem basically is that we have a very distortedeconomy,” Greenspan said. Any recovery has mostly been limitedto large banks, large businesses and “high-income individualswho have just had $800 billion added to their 401(k)s, and arespending it and are carrying what consumption there is.”
S&P 500
While the Standard & Poor’s 500 Index has fallen from itshighest levels of 2010, its July 30 close of 1101.6 is 63percent higher than its trough in 2009. Greenspan said acontinuing rise in the stock market would further stimulate theeconomy.
“The rest of the economy, small business, small banks, anda very significant amount of the labor force, which is in tragicunemployment, long term unemployment -- that is pulling theeconomy apart,” Greenspan said.
The Labor Department will report on Aug. 6 that theunemployment rate rose to 9.6 percent in July from 9.5 percentin the prior month, according to the median of a Bloombergsurvey of 57 economists. Greenspan said he expects “we juststay where we are” with unemployment for the rest of the year.
“There’s nothing out there that I can see which will alterthe trend or the level of unemployment,” he said.
Greenspan repeated his warning that fiscal deficits couldpush up long-term interest rates and threaten the recovery.
Financial System ‘Broke’
“At the moment, there is no sign of that, basically becausethe financial system is broke, and you cannot have inflation ifthe financial system is not working.”
In an interview last month on Bloomberg Television’s“Conversations with Judy Woodruff,” Greenspan said that taxcuts enacted under President George W. Bush should be allowed toexpire at the end of the year.
Greenspan repeated this view on NBC, saying, “I’m verymuch in favor of tax cuts. But not with borrowed money.”
Greenspan appeared on “Meet the Press” alongsidePennsylvania Governor Ed Rendell and New York City Mayor Michael Bloomberg. The mayor is founder and majority owner of BloombergNews parent Bloomberg LP.
Bloomberg said the tax cuts should be continued for now.“I would say let’s go on with the tax cuts for another coupleof years, but you couple it with long-term solutions,”Bloomberg said.
Rendell said he would accept phasing out the tax cuts overtwo or three years, though eventually “you have to haveincreased taxes along with those reductions.