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.

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Why the Fed bailout might not work

There are so many reasons why the bailout won't work. Here are some specifics about the flaws in the current bailout plan.

Harry

Why the Fed bailout might not work

The announced plan to make credit markets more liquid could end up having the opposite effect.
By Peter Eavis, senior writer

NEW YORK (Fortune) -- The Federal Reserve's latest move to make credit markets more liquid could deepen problems in the banking system and actually cause the markets to be even more illiquid.

Wednesday, the Fed, along with other central banks, announced a plan that is designed to enable banks to borrow money directly from the Fed at below-market rates. This will allow a wider range of banks to access Fed credit, and simultaneously allow them to submit a broader range of collateral to the Fed when taking out those loans.

Why do this now? The Fed explained in a release Wednesday: "This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress." In layman's terms this means that rates on loans between banks - measured by something called the London Interbank Offered Rate, or Libor - are too high for the Fed's tastes, so it is now prepared to itself lend to banks at much lower rates.

Before this move, banks could borrow directly from the Fed through the so-called discount window, at 4.75 percent. The key Federal funds rate is lower, at 4.25%, but that is open to a narrower range of financial institutions and accepts a narrower range of collateral than the discount window. The new program - called the Term Auction Facility (TAF) - will auction funds to banks at rates very close to the lower Fed funds rate. The first TAF auction, for $20 billion, is scheduled to begin on Dec. 17.

The potentially dangerous aspect of the TAF is that it will allow banks with problems to borrow their way out of trouble, rather than by taking measures like issuing large amounts of stock to bolster their balance sheets. Struggling banks are struggling chiefly because they were mismanaged and wrote too many risky loans when credit was cheap. The TAF potentially gives mismanaged banks even more cheap credit, which will delay a much-needed restructuring of the banking sector. Nervousness about banks could then deepen, leading to even fewer loans being made.

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The Fed's tightrope act

It's a long way down with no net. It may just take one more gust of wind and it's down down down.

Harry

The Fed's tightrope act

The banking industry is in a quagmire but the economy really isn't in that dire shape. And inflation is still an issue. What's Ben Bernanke and company to do?

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By Paul R. La Monica, CNNMoney.com editor at large

December 13 2007: 1:02 PM EST

NEW YORK (CNNMoney.com) -- The financial services industry is reeling due to exposure to bad subprime mortgage loans. But some market observers suggest that the rest of the economy is still in relatively decent shape, which could mean that the Federal Reserve may not cut interest rates that much further in 2008.

On Thursday, the government reported that the Producer Price Index, which measures wholesale prices, rose 3.2 percent, the biggest jump in 34 years. To be sure, much of this increase was due to soaring oil prices.

But the so-called core PPI number, which excludes volatile energy and food prices, rose 0.4 percent, above Wall Street's expectations of just a 0.2 percent increase. This could be a sign that inflation is still a concern.

What's more, despite all the doom and gloom about the housing market, the Commerce Department reported Thursday that retail sales surged 1.2 percent in November. And even if you exclude sales at gas stations, which were obviously juiced by rising prices at the pump, sales were still up a healthy 0.6 percent.

Largest jump in 34 years for wholesale prices

Add this up and the Fed's two big announcements this week suddenly seem to make a lot more sense.

"It's clear that the economy's moderation in recent months has been relatively gentle. There has been no outright collapse," said David Resler, chief economist with Nomura Securities International. "The economy may be on the soft side, but that doesn't mean we're going into a recession."

The Federal Reserve cut two key interest rates by only a quarter of a percentage point Tuesday, a move that caused Wall Street to panic. The Dow plunged nearly 300 points.

Many investors were hoping for a half-point cut, or at the very least, a half-point cut to the discount rate, which is what it costs banks to borrow directly from the Fed. But Wednesday, Ben Bernanke & Co. saved face somewhat by announcing a plan to inject billions of dollars into the banking system.

In conjunction with several other central banks in Canada and Europe, the Fed said it would conduct four auctions in the next month that will allow banks to bid for loans. Sources said it will probably cost banks less than the 4.75 percent discount rate to borrow money this way.

The combination of a mild rate cut and the new auction system seems to indicate that the Fed is looking for a creative way to solve the credit crunch on Wall Street rather than by simply slashing interest rates.

Source here.