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Former US Fed Chief Somber on Economic Prospects

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Amid continued upheaval among America's biggest financial firms, a former head of the U.S. Federal Reserve says even more institutions could face insolvency, and that the United States appears unlikely to avoid an economic recession.  From Washington, VOA's Michael Bowman reports.

After leading the U.S. central bank from 1987 until two years ago, Alan Greenspan remains one of America's influential voices on economic matters.

Greenspan says America's current financial climate, in which the Federal government has felt compelled to seize control of two mortgage giants and engineer the takeover of a major investment firm, is unlike anything he has ever seen before.

Appearing on ABC's This Week program, Greenspan said the near-collapse of another well-known investment firm, Lehman Brothers, only adds to his consternation.

"This is a once in a half century, probably once in a century, type of event.  There is no question that this is in the process of outstripping anything I have seen.  And it still is not resolved and it still has a way to go," he said.

Greenspan tied the upheaval in financial firms to turmoil in America's housing market, saying the current picture will not improve until falling home prices stabilize in the United States.

Earlier this year, the Federal government provided an emergency loan to investment giant Bear Stearns, and helped engineer the selling of the firm to a rival corporation. Last week, the Bush administration took over two government-sponsored private mortgage firms, Fannie Mae and Freddie Mac, to rescue them from insolvency.

Greenspan said endless government rescues are not a good idea.

"We should not try to protect every single institution. The ordinary cost of financial change has winners and losers, to the extent that bailouts are draws on our scarce savings supply, you undermine the growth of the economy, and ultimately you get stagnation," said Greenspan.

But the former fed chief did say that some firms and institutions warrant assistance.

"There are certain types of institutions which are so fundamental to the functioning of the movement of savings into the real investment in an economy that on very rare occasions - and this is one of them - it is desirable to prevent them from liquidating in a sharply disruptive manner," continued Greenspan.

Despite a housing crisis, wild fluctuations in energy prices, and a jump in unemployment, the U.S. economy has continued to expand, albeit at a slow pace.  Greenspan indicated he is pessimistic as to whether the United States and the larger world economy can avert a recession altogether, saying the chances are, in his words, "less than 50 percent."

"I cannot believe we could have a once in a century type of financial crisis without a significant impact on the real economy, globally," he said.  "And I think that is, indeed, what is in the process of what is occurring."

Greenspan noted some economic positives: recent declines in oil prices and as well as in U.S inflation.  He said he would be delighted if the United States managed to stave off a recession, but added he would not bet on such an outcome.  
 

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