Continued stagnation this year may be the best the US can hope for
(WASHINGTON) Former Federal Reserve chairman Alan Greenspan said the US has slipped into an 'awfully pale recession' and may continue to languish for the rest of the year.
Mr Greenspan: Recovery won't begin until US home prices show signs of stabilising'We are clearly receding', with economic growth now at about zero per cent, he said in an interview with Bloomberg News.
Mr Greenspan, who now consults for clients including Deutsche Bank AG, also said it was too soon to declare the end to the credit crisis stemming from the collapse in the US sub- prime mortgage market.
The former Fed chief's assessment echoes figures in the past month that show declines in the manufacturing and housing industries, though fewer job losses than economists forecast.
Mr Greenspan's successor, Ben Bernanke, and his colleagues indicated last week that they are ready for a pause in interest-rate cuts after seven reductions since September.
Mr Greenspan spoke the day before the Federal Open Market Committee's April 30 statement, where it dropped a previous reference to 'downside' risks to growth and noted 'uncertainty' about the outlook for inflation.
While declining to comment on monetary policy, Mr Greenspan said the US economy is returning to a more inflation-prone period. Import prices are rising, as are wages overseas, adding to pressures already caused by soaring costs of food, energy and other commodities.
Mr Bernanke was scheduled to speak on mortgage markets yesterday at 8.30pm in New York.
Mr Greenspan, 82, portrayed the US economy as being caught in a 'tug-of-war' between cash-rich businesses on the one hand and money-losing financial institutions on the other.
'This is a very unusual situation,' he said. 'Neither side is obviously winning the battle.'
The US economy grew at a 0.6 per cent annual rate over the last two quarters, the slowest pace since the 2001 recession.
Mr Greenspan said that continued stagnation for the rest of this year may be the best the US can hope for and might even be the most likely outcome. 'That's certainly the most benevolent scenario,' he said. 'It's not all that far from being the most probable.'
'We're in a recession,' he said. 'But this is an awfully pale recession at the moment. The declines in employment have not been as big as you'd expect to see.'
The former Fed chief said a recovery won't begin until home prices show signs of stabilising, relieving pressure on financial firms to write off mortgage-related losses.
'Until there are stabilised prices of homes - and I think they have a good way to go down - you still have prospective losses' for financial companies and investors. 'It's too soon to tell' if the worst of the credit crunch is over, he added.
'It is possible, not probable, that prices could bottom out' towards the end of the year, Mr Greenspan said.
He saw the US economy reverting to the period prior to the 1990s, when inflation was more of a threat.
'The trade-off between inflation and growth is clearly turning adverse,' he said. 'We're going back to where we were before the end of the Cold War.'
Mr Greenspan in the past had argued that the expansion of the global labour force brought on by the collapse of the Soviet Union and the rise of China was a powerful force bringing down global inflation. That trend is now fading as workers in the emerging markets obtain higher wages. -- Bloomberg
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