The Subprime Bailout: Too little Too Late

The consensus is moving from the soft vs. hard landing debate towards how severe the hard landing will be

Nouriel Roubini Dec 11, 2007

While a few months ago analysts were still heatedly debating whether the US would experience a soft landing or a hard landing (a recession) the center of the macro debate has now clearly shifted away from soft landing versus hard landing discussion to a recognition that a hard landing is the most likely scenario; thus, increasingly now the debate is on how deep and severe the forthcoming hard landing will be.

David Rosenberg of Merrill Lynch is now clearly predicting a recession for the US economy in 2008; Jan Hatzius at Goldman Sachs is not formally speaking of a certain recession in 2008 but most of his analysis is consistent with a high likelihood of a recession in 2008; Mark Zandi of Moody’s Economy.com is also very close to a hard landing view.

More interesting now even the thoughtful Richard Berner – who used to be strongly in the soft landing camp while his counterpart Steve Roach was in the hard landing camp – is now predicting a recession in the US in 2008, even if he expects such a recession to be mild. And even the soft-landing optimists at JPMorgan are now recognizing that the likelihood of a US recession is now at its highest level in years. When mainstream analysts such as Berner start to talk about a recession beng likely you know that the debate has clearly shifted towards a discussion of not whether a recession but rather how deep of a recession.

And in the academic camp some of the most senior economists in the profession – Bob Shiller, Marty Feldstein, Larry Summers, Paul Krugman – are all in various degrees in the hard landing camp or very concerned about a hard landing.

So it is time to move away from the soft landing vs. hard landing discussion and start considering seriously how deep the coming recession will be; in the view of this authors the 2008 recession will be more deep, protracted and painful than the short recessions of 1990-1991 and 2001; this time around – unlike 2001 when only tech investment faltered - most components of aggregate demand are under threat: falling residential investment, falling capex spending by the corporate sector and now evidence of a sharp slowdown and near stall of private consumption that accounts for 70% of GDP. When the US saving-less and debt burdened US consumer is now under threat the risk of a more protracted and severe recession than the mild one of 2001 are significant.

And don’t be misled by better than expected reported same store chain store sales for November this week; those data – as known to all analysts – are distorted by the longer sales calendar in November compared to 2006; whatever gains will be obtained in November will be undone by a payback in December. As Goldman Sachs put it today in a note to clients:

Same-store sales data for major retailers improved substantially in November. Our Goldman Sachs Retail Index jumped to 4.5% on a year-over-year basis, from 1.2% in October. From this vantage point, it looks like the indefatigable American consumer is spending freely as the holiday season gets underway. However, the improvement in monthly data contrasts with relatively tepid weekly reports and declining consumer confidence, and is mostly explained by reporting differences. Some retailers compared a four-week November that ended with the Thanksgiving week in 2006, but included the week after in 2007. The extra holiday shopping days in 2007 boosted sales at these retailers, but will involve a payback in the next release, which will now have fewer holiday shopping days than last year. We estimate this distortion accounted for roughly 2½ percentage points of the improvement in the GSRI… The corollary of better November data is a headwind for December retail sales reports. If the effect of over two percentage points is symmetric, then December same-store sales stand a good chance of coming in at or below zero.

Indeed, according to the UBS/ICSC data that looks at a broader range of retailers than the major ones same store chain store sales fell in 3 out of the 4 weeks of November with the figure in the reporting week ending on December 1st being a negative 2%.

So the US consumer is indeed at a tipping point and the overall holiday sales will end up showing the weakness in the sector that represents over 70% of GDP. If the saving-less US consumer falters – as it soon will being hit by falling home prices, falling HEW, rising debt servicing ratios, high debt burdens, high oil prices, sharply falling confidence, a slackening labor market – a recession becomes inevitable.

Indeed, as reported by the WSJ, the consensus among professional economists is now shifting towards the hard landing scenario as they put the chances of a recession at 38%, the highest in more than three years:

Economists Say Recession Risk Is Climbing By PHIL IZZO December 11, 2007; Page A3 The risk of a U.S. recession is rising, and the Federal Reserve should do something about it, according to economists in the latest WSJ.com survey.Fed officials have "to move to show their willingness to both avert risk of recession and stabilize the financial crisis," said Diane Swonk of Mesirow Financial. She said Fed Chairman Ben Bernanke's emphasis on consensus has proved to be the central bank's "weak spot in crisis mode. Now they need to show conviction instead of consensus."

Fifty of the 52 economists surveyed expect the Federal Open Market Committee to trim its target today for the federal-funds rate, the rate charged on overnight loans between banks. Only two see the Fed holding the rate steady at 4.5%.Some 61% say a quarter-percentage-point cut would be right; 27% say the Fed should cut rates by a half-point. Only 12% say the Fed should stand pat.

The economists, on average, now put the chances of a recession at 38%, the highest in more than three years, and up from 33.5% in November. They also reduced forecasts for U.S. economic growth across the board. They expect the nation's gross domestic product to grow at an annualized rate of 0.9% this quarter, down from 1.6% in the previous survey, with six economists expecting either a negative or a flat reading. Three economists project an economic contraction in the first quarter, with the average growth forecast at 1.5%, down from 1.9% in November.

Source Here

Mr. Roubini predicts the housing crisis almost two years ago

China using "soft power" for Central Asia riches

New 'Great Game' for Central Asia riches

By DOUGLAS BIRCH and MANSUR MIROVALEV, Associated Press Writers 1 hour, 40 minutes ago

KHORGOS, Kazakhstan - The driver of the 18-wheel tractor-trailer from China idling at the Kazakhstan-China border said apples were the cargo he brought to Almaty, Kazakhstan's booming commercial center.


For Kazakhs, there's a tart irony in the shipment.

Almaty's region is where the first apple trees were found and the first apple orchards planted. The city was a center of the Soviet Union's s fruit industry. Its very name means "Father of Apples."

In the past few years, Chinese fruit, vegetables, TV sets, T-shirts and tires have flooded markets along the old Silk Road in former Soviet Central Asia. Each day, all along the Chinese border, hundreds of tractor-trailers rattle west.

These goods are the most visible sign of Beijing's growing power here as China, Russia, the United States and others compete for financial and strategic advantage on the borders of some of the world's most turbulent countries — Iran, Afghanistan and Pakistan.

It's a struggle in which China seems to be gaining the upper hand.

At stake are oil, hydropower sources, strategic metals, pipelines, transit routes and access to markets. The chief prize is energy supplies: China needs them, Russia wants to control their distribution, and Western powers want to ensure they are not monopolized by Moscow or Beijing.

China today is reaching deep into Central Asia to tap oil and gas reserves, using pipelines and investments to challenge Russia's monopoly on gas shipments and to thwart Moscow's hopes of controlling a bigger share of the region's oil.

In recent years, China and Russia have forged a strategic alliance, as part of a group called the Shanghai Cooperation Organization, to squeeze the United States out of Central Asia, after the U.S. established military bases here. They have largely succeeded.

However, friction is developing between the two neighboring giants. And given China's 1.3 billion people and its economic strength, it seems certain that Russia, with its dwindling population and economy based narrowly on energy, will increasingly be on the defensive.

Of course, Russia's two-century presence in region gives it potent advantages in trying to preserve its influence.

But Niklas Swanstrom of Johns Hopkins University's School of Advanced International Studies argues China is succeeding in using "soft power" — judiciously apportioned aid, aggressive diplomacy and massive investment — to shove Russia aside.

"China will be the dominant player over time," he predicts.

Nowhere, perhaps, is China's presence more starkly evident than at Khorgos, straddling the Kazakh-China border.

On the Kazakh side sits a sleepy village, a mosque and arid steppes where shepherds ride horseback. On the Chinese side sprawls a city, its skyline punctuated by two construction cranes, the skeletons of several large buildings and a massive white arch topped by two scarlet Chinese flags.

Talipzhan Suleimanov, a captain in the Kazakh border service in Khorgos, stood outside his ramshackle post and pointed at the gleaming Chinese city across a dry riverbed.

"This looks like the U.S.-Mexican border," he said. "We are the Mexicans, because the Chinese are so much more advanced."

Central Asia — which includes Turkmenistan, Uzbekistan, Tajikistan, Kyrgyzstan and Kazakhstan — was long regarded as the middle of nowhere, caught between Russia, China, Siberia and Afghanistan's Hindu Kush mountains.

The region emerged from isolation about 200 years ago as Russian imperial troops and British spies competed for influence in a rivalry that Rudyard Kipling called "The Great Game."

In today's Great Game, Russia finds itself struggling to shore up its influence through arms sales and energy contracts, dominance of mobile phone and TV networks, and shared language and culture — as well as the Kremlin's pledges of billions in fresh investment.

Above all, Moscow wants to preserve its monopoly on distributing Central Asian gas and its major role in other energy sectors. To this end, President Vladimir Putin proposed at an October regional summit in Tehran that all the Caspian Sea states have a veto on any new pipelines crossing the sea bed — apparently so Moscow can block plans to connect Kazakhstan's and Turkmenistan's rich oil and gas fields to the west, bypassing Russia.

But Moscow's dominance of the region's energy reserves is eroding. Despite Russian pressure, both Kazakhstan and Turkmenistan have welcomed discussion of a trans-Caspian pipeline — and Putin's proposal was met with silence.

Twice in the past two years, Turkmenistan has signed contracts to ship natural gas west through Russian pipelines — only to turn around a month later and, in effect, promise to ship the same gas east to China.

Beijing is playing a subtler game. It is a customer, not a competitor, for Central Asia's hydrocarbons and other natural resources. It is playing offense not defense, buying oil companies and expanding its access to Middle Eastern gas and oil through a network of new highways, railroads and pipelines.

During much of the 20th century, Central Asia was a source of raw materials for Soviet factories and a captive market for shoddy Soviet goods. After the Soviet collapse, Russian goods vanished here, replaced first by merchandise from Turkey and now from China.

While Russia is now drenched in oil wealth, its hopes of restoring many of its industries — and weaning itself from reliance on sky-high oil prices — depend on regaining access to markets like those here.

Russia sees Central Asia as an inheritance from its imperial Czarist and Communist past. For China, with its appetite for raw materials and its awakening as a world power, Central Asia is the Wild West: a land of opportunity, a reservoir of resources and a corridor to the Middle East's oil fields and Europe's wealthy shopping districts.

China has been moving in quietly and steadily since the mid 1990s, when trucks loaded up on scrap iron, steel and copper at derelict Soviet factories and carted the metals back to China for recycling.

In the 1990s, China did relatively little trade with Kazakhstan — Central Asia's economic motor, an oil- and gas-rich nation of 15.2 million larger than Western Europe. But by 2006, China ranked third behind Germany and Russia in Kazakhstan's $35.6 billion export market and second after Russia in the nation's $22 billion import market.

The tiny, mountainous nation of Kyrgyzstan imported almost nothing from its giant neighbor to the East. By 2006, 57 percent of Kyrgyzstan's imports came from China — and only 15 percent from Russia.

In Khorgos, trucks leave China packed and typically return empty. The road to the border bears the scars of this one-way trade. The lane leading away from China is deeply rutted, the one leading back is smoothly paved.

In 2003, Beijing predicted a 30- to 50-fold increase in its trade with Central Asia within a decade.

China's growing clout makes many Central Asians anxious.

"Sometimes, it feels uneasy to be next to such a mighty neighbor," said Anastasiya Zhukova, a 24-year-old ethnic Russian and Kazakh citizen who works as a linguist for Chinese companies.

No one expects China to try to conquer Central Asia by military might. But some fear China may transform these countries into "vassal states" with little power to resist Beijing in conflicts over trade or foreign policy.

After Sept. 11, the United States seemed poised to vastly expand its influence here. But after establishing two military bases, it lost ground. It has been forced to close its base in Uzbekistan, and the other, in Kyrgyzstan, is under pressure.

Experts say the U.S. has retreated partly because of pressure from Russia and China, partly for a lack of interest: some American officials see Central Asia's oil and gas fields as too remote to meet U.S. energy needs.

Washington has alienated the region's authoritarian governments by criticizing human rights abuses. The Iraq war, meanwhile, raised concerns that the U.S. will push regime change to secure oil supplies — a fear the Chinese have exploited.

"China does not pursue a policy of waging wars for energy resources, unlike the United States in Iraq," Dong Xiaoyang, a Chinese diplomat, told a September conference of scholars and diplomats in Almaty.

But China knows much of its future energy supply is here.

The state-owned China National Petroleum Company bought PetroKazakhstan in 2005 for $4.2 billion, then China's biggest foreign acquisition. In July 2006, the CNPC and Kazakhstan's Kazmunaigaz completed a $700 million, 597-mile oil pipeline across Kazakhstan to Alashankou in northwest China.

The pipeline, designed to supply up to 15 per cent of China's oil needs, will serve the major new Chinese refinery in Karamay, to open in 2008. By some estimates, one-sixth of Kazakhstan's oil production will someday be pumped to China.

Turkmenistan in August started building a 4,350-mile natural gas pipeline through Kazakhstan to northwest China. When completed in 2009, the pipeline is expected to provide China with 1.1 trillion cubic feet of natural gas a year.

Cheap Chinese goods have turned many poor Central Asians into consumers. But some experts say dependence on Chinese products slows the growth of local industries.

"Our industrial production has been going down for years because of the cheap Chinese goods," said Konstantin Syroezhkin of the Kazakh Center for China Studies. "China is not interested in development of our industries. China has already turned us into an ideal consumer."

Others welcome Chinese investors.

Tajikistan, with a per capita annual gross domestic product of just $1,300, desperately needs investment. Saifullo Safarov, deputy director of the Center for Strategic Research in Tajikistan, said that without Chinese money, his country can't exploit its mineral wealth, locked in what he called "the treasure chest of the Pamir Mountains."

In July, the Chinese Zijin Mining Group bought 75 percent of Tajikistan's Zerafshan Gold Company, once controlled by a British company, and in late September it claimed to have increased the mine's production by 50 percent.

Despite China's economic onslaught, Russia retains enormous influence. Moscow is still the intellectual, economic and business capital for Central Asians, and Russia's capital and other cities draw millions of Central Asian students, merchants and workers.

"Economically, China has conquered all markets, but our mentality remains Soviet and we look at Russia for culture," said Zhukova, the Russian in Kazakhstan whose ancestors helped found Almaty in the 19th century.

Former Prime Minister Almazbek Atambayev of Kyrgyzstan, in an interview with The Associated Press, said the bonds between Russia and the other former Soviet states remain strong. "In many ways, it's like the relation between the United States and Great Britain," he said.

But powerful forces are driving them apart.

All Central Asian nations are promoting their native languages at the expense of Russian, once the lingua franca here. The region used to share Moscow's secular faith in Marxism. Now, Russia is rediscovering its Orthodox Christian roots as Central Asia is gripped by a Muslim revival.

The road from Osh, Kyrgyzstan's second-largest city, to Kyzl-Kyya in the verdant Ferghana Valley, is dotted with the glittering metal domes of new mosques.

Russian popular culture is still entrenched here. But today's Silk Road markets, reborn as warrens of metal shipping containers, sell movies from Hong Kong and American pop music. Radio disc jockeys speak in a polyglot of Russian, English and their native languages.

China so far has filled only part of this vacuum.

Central Asian leaders say that in today's Great Game, the challenge for them is the same as in the past — to benefit from the competition while ensuring none of the players becomes dominant.

"We will retain our independence," said Atambayev, "only if we maintain equally friendly relations with all the countries around us, and not be subdued by one of the powers around us."

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All of asia is affected, here's a video about Korean "Goose Dads"

Fannie CEO: housing trouble until 2009

One more prominate real estate industry figure states for the record that the US housing crisis will last until 2009, "at the earliest." Just yesterday former Fed chairman, Alan Greenspan, said that the odds the U.S. falling into a recession are "clearly rising" The drum beats louder. Can you hear it?

Harry

Fannie CEO: housing trouble until 2009

By MARCY GORDON, AP Business Writer 2 hours, 24 minutes ago

WASHINGTON - Fannie Mae's CEO (Mudd) told shareholders Friday he does not expect a housing market recovery until late 2009, "at the earliest," and that the mortgage-finance company is strong enough to ride out the downturn...

Mudd said Fannie Mae was "in a stronger position" because of the extensive changes to its management and operations over the past three years made in the wake of its $6.3 billion accounting scandal and with the recent steps taken to curb losses and buttress its finances.

He called them "extraordinary steps, but steps we believe are prudent."

The Fannie chief reaffirmed his gloomy forecast for the housing market, saying "This is the worst housing and mortgage market in recent memory, and we are still working our way to the bottom, in our view."

Source here.

Inflation hottest in two years

There should be little doubt that with commodity prices at near record highs, the ever weaker greenback, repeated cuts in interest rates and the flooding of the market with dollars that inflation would soon show its unwelcome head.

Now, with inflation clearly on the rise, the chances of further interest rates cuts drops. Therefore, the odds of a recession increase. The Federal Reserve is a jam. Reducing rates, printing money will lead to even higher inflation and if they decide to sit on their hands...recession.

It's time to look at your financial situation and protect yourself from either scenario. I will be posting financial strategies to consider in times such a these.

Harry

Inflation hottest in two years

By Mark Felsenthal 15 minutes ago

WASHINGTON (Reuters) - Consumer prices rose the most in more than two years in November as energy costs surged and a host of other prices marched higher, damping prospects of further interest-rate cuts from the Federal Reserve.

The Labor Department said on Friday that the consumer price index jumped 0.8 percent in November, the biggest gain since September 2005, as energy costs leaped 5.7 percent.

Even stripping out fast-rising food and energy prices, the so-called core CPI rose a relatively steep 0.3 percent, the largest increase since January and ahead of the 0.2 percent rise expected on Wall Street.

"It puts the Fed in a little bit of a bind and people have to question how aggressive the Fed can be in cutting rates if inflation is rearing its ugly head," said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

U.S. stock and government bond prices fell and the value of the dollar hit a seven-week high as traders saw the data suggesting slimmer chances of further rate cuts from the Fed, which has lowered borrowing costs by a percentage point over the past three months. At mid-day, the Dow Jones industrial average (.DJI) was off about 80 points.

"All of these dovish, weak-money individuals out there screaming for rate cuts really need a bucket of cold water in the face because if the Fed goes down that path we may have a bubble in the CPI," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

GASOLINE ON THE FIRE

Gasoline prices rose 9.3 percent last month, the steepest climb in half a year. Over the past 12 months, gasoline costs are up 37.1 percent, the biggest one-year gain since September 2005.

However, the increase in consumer prices was broadly based.

Apparel costs rose 0.8 percent, medical care prices increased 0.4 percent and owners' equivalent rent -- a gauge of the cost of home ownership that accounts for nearly one-quarter of the overall CPI -- gained 0.3 percent.

The report on consumer prices followed producer price data on Thursday that showed an unexpectedly steep 3.2 percent climb, the biggest increase in 34 years.

Inflation in the 13-nation euro zone was also on the rise last month, with prices up 3.1 percent year-on-year, the steepest gain in six and a half years and a reminder that the Fed is not the only central bank struggling to tamp down inflation at a time growth is threatening to falter.

At the same time, policy-makers expressed concern that high energy and commodity prices could fuel broader inflation.

Read full article here.

Citigroup Rescues SIVs With $58 Billion Debt Bailout (Update1)

Is this $58 BILLION Debt Bailout in the best interest of the Citigroup's shareholders? Are Citigroup action's actually preventing a meltdown in the capital markets or delaying the inevitable, which down the road could be a far bigger problem. I'm afraid that no matter how massive the bailout funds amount to...the bigger the bailout warchest, the consequences and side effects could result in a equal or even more powerful effect in the opposit direction.

Harry


Citigroup Rescues SIVs With $58 Billion Debt Bailout (Update1)

$58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.

Citigroup follows HSBC Holdings Plc, Societe Generale SA and WestLB AG in bailing out SIVs to avert fire sales of assets. The funds, which sell short-term debt and invest the proceeds in higher-yielding securities, have cut their holdings by more than 25 percent since August to $298 billion, according to Moody's. The decline may reduce the urgency for a bailout sponsored by the U.S. Treasury, Citigroup, Bank of America Corp. and JPMorgan Chase & Co.

Ratings Cut

Moody's lowered Citigroup's credit rating to Aa3, the fourth-highest level, from Aa2 late yesterday. The bank will probably ``take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations, Moody's Senior Vice President Sean Jones said in a statement.

``Citigroup's weak earnings should prohibit the bank from rapidly restoring weak capital ratios,'' which may lead to further downgrades, Jones said.

SIVs emerged in August as one of the biggest threats to capital markets that were rocked by record high defaults on subprime mortgages. Financial institutions have since reported more than $70 billion of losses and writedowns. Citigroup invented SIVs in 1998 and was the biggest manager of the funds.

The average net asset values of SIVs tumbled to 55 percent from 71 percent a month ago and 102 percent in June, according to Moody's. The net asset value is the amount that would be left for investors if a fund had to sell holdings and repay debt. Moody's said Nov. 30 that it may cut the credit ratings on $105 billion of SIV debt.

Source Here.

Online video helps troubled borrowers spot fraud

By Patrick Rucker Wed Dec 12, 4:35 PM ET

WASHINGTON (Reuters) - Fraudsters are targeting troubled borrowers facing foreclosure in a scheme that could leave homeowners with even more debt than they otherwise would face, a new online video warns.

In the video that dramatizes a common case of fraud, a homeowner receives an unsolicited offer to help settle mortgage debt but ends up homeless and with battered credit.

Under a common scheme, a con artist will seek out a public notice of foreclosure and approaches the potential victim with documents and the promise of sorting out the debt.

"You sign, thinking you are saving your home but you are really giving the con artist the deed to your house," according to the video called Avoid Fraud, which can be found on the Internet site YouTube. (http://www.youtube.com/avoidfraud )

Once a con artist has the deed to a home, he can strip out any untapped value and also charge new expenses under the borrower's name, according to Freddie Mac, the mortgage finance company that produced the video.

Rather than accept unsolicited offers of help, troubled borrowers should contact their mortgage servicer or lender directly, Freddie Mac advises.

Borrowers can also get free credit counseling help from a government-chartered program called HOPE NOW by dialing 1-888-995-HOPE (4673).

Freddie Mac produced the film because one in four troubled borrowers turn to the Internet for advice first on how to get help saving their homes, said Ingrid Beckles, the company's vice president for asset management.

"With fraud reports on the rise, we are using every communication channel out there to warn borrowers about these fraudsters and urge borrowers to call their lenders when they fall behind on their mortgage," she said.

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Greenspan: Odds rising for a recession

In an interview with NPR News, Mr. Greenspan says that the odds of a recession are “clearly rising” because of the slowdown in economic growth. “We are getting close to stall speed … and we are far more vulnerable at levels where growth is so slow than we would be otherwise,” the former Federal Reserve chairman says. “Indeed it’s like someone who has an immune system that’s not working very well is subject to all sorts of diseases and the economy at this lever of growth is subject to all sorts of shocks.”

Many say that it was Greenspan and his policies that led up the and were some of the root causes of the housing bubble and subsequent collapse. But, Greenspan says he’s not to blame for the housing bubble and credit crisis that have spread like a virus throughout the nation’s economy.“We’ve had housing bubbles in two dozen or more countries around the world all of which look almost identical to ours and the reason why we’ve had these bubbles everywhere is everybody’s long term rates have gone down, and that in turn I trace back to the extraordinary events that occurred when central planning became an obviously inefficient way to operate an economy,” he tells the host of Morning Edition.

Out of office, but his words still hold weight and influence. He's part of a seemingly ever growing chorus of powerful economic, business and political voices enlightening but also adding momentum as our economy spirals down into a full blown recession.

Harry

Greenspan: Odds rising for a recession

By JEANNINE AVERSA, AP Economics Writer Thu Dec 13, 6:56 PM ET

WASHINGTON - Former Federal Reserve Chairman Alan Greenspan says the odds the U.S. will fall into a recession are "clearly rising" and he believes economic growth is "getting close to stall speed."

Greenspan, who ran the central bank for 18 1/2 years, until early 2006, offered his views on the economy in an interview on NPR News' Morning Edition that will air on Friday. Excerpts of the interview were released on Thursday.

A severe slump in the housing market, a stubborn credit crisis and turbulence on Wall Street are endangering the country's economic health. Growth in the current October through December period is expected to have slowed to a feeble pace of just 1.5 percent, or less.

Economists, including Greenspan, have warned that the chances of a recession are growing.

Asked whether the economy will tip into a recession — something that has not happened since 2001 — Greenspan said, "It's too soon to say, but the odds are clearly rising."

He said he felt this way because of the slowing pace of growth. "We are getting close to stall speed," he said. "We are far more vulnerable at levels where growth is so slow than we would be otherwise," he added. "Indeed, it's like someone who has an immune system that's not working very well is subject to all sorts of diseases and the economy at this lever of growth is subject to all sorts of shocks."

Greenspan's remarks come just days after the Federal Reserve, under Chairman Ben Bernanke, sliced a key interest rate for a third time this year to prevent the housing and credit troubles from sinking the economy.

The situation poses the biggest challenge yet to Bernanke since succeeding Greenspan in February 2006.

Some analysts have questioned whether Bernanke waited too long to cut the Fed's key rate and whether he has acted aggressively enough to soothe the economy's woes. The Fed initially dropped its key rate in September, the first reduction in four years. That was followed up by additional rate cuts in late October and then again on Tuesday.

Greenspan again rejected criticism that his policy actions helped to feed a housing boom that eventually went bust. Critics say Greenspan held interest rates too low for too long after the 2001 recession.

To have prevented such euphoria in housing that fed a bubble in prices, Greenspan said the Fed would have had to jack up interest rates so high that it would have damaged the economy. "That would have broken the back of the economy, and brought the housing boom down," Greenspan said.

Source Here.