Greenspan risks new row with Fed

Greenspan risks new row with Fed
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: March 6 2007 19:08 | Last updated: March 7 2007 00:34



Alan Greenspan risked stirring renewed controversy on Tuesday when he told the Bloomberg news agency that there was a “one-third probability” of a US recession this year.

The former Federal Reserve chairman’s comments are starkly at odds with the relatively upbeat assessment made by Ben Bernanke, his successor, in testimony to Congress last week.

Mr Greenspan’s latest remarks come barely a week after he told investors in Hong Kong that he thought a US recession this year was “possible”. The earlier comments spread quickly through the investment community, spooking investors and contributing to turmoil in financial markets.

Following a global sell-off in equities and other assets, Mr Greenspan was forced to clarify his statement, declaring he had said that a recession this year was “possible” but not “probable”.

The markets appeared to take Mr Greenspan’s latest comments in their stride but the remarks show he has decided not to keep quiet in the light of the past week’s experience, highlighting a dilemma for Mr Bernanke.

The Fed chairman is inclined to think it is not Mr Greenspan’s fault the market takes his comments so seriously. Moreover, such is the respect and goodwill towards Mr Greenspan within the Fed, as well as in markets globally, that there would be little benefit for Mr Bernanke in being seen to clash publicly with him.

However, the apparent second-guessing of the Bernanke Fed’s economic view by its former chief risks adding to the volatility and undermining the current chairman’s efforts to establish his authority in the markets.

Mr Greenspan on Tuesday told Bloomberg he was “surprised at this recent episode”. He said: “I was aware of the problem that if I stayed public I could make it difficult for Ben. For the most part it has worked. I was beginning to feel quite comfortable that I was fully back to the anonymity I was seeking.”

He said there were signs that the US’s economic expansion was ageing. “We are in the sixth year of a recovery. Imbalances can emerge as a result,” he said.

Mr Bernanke has not put any figure on the likelihood of a US recession this year. However, his public remarks suggest that, while he feels there may be some chance of a hard landing so painful that it results in negative growth this year, the likelihood of that is much less than one in three.

Mr Greenspan’s interview overshadowed a speech by Mr Bernanke later in the day, in which he called for new legislation to tighten controls on Fannie Mae and Freddie Mac, the government-sponsored mortgage finance institutions.

Mr Bernanke said their portfolios “represent a potentially significant source of systemic risk”. He suggested that the two institutions should only keep on their books loans that promoted low-cost housing.