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Greenspan and Other Experts on the U.S. Economy

As a business owner, you might be trying to learn how the U.S. economy will perform in 2008. You have heard about recession, inflation, cooling, mortgage crisis and more. A survey by Bloomberg News Service among economists and a series of recent interviews to former Federal Reserve Chairman Alan Greenspan can help us understand where we are.

U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, according to a survey of 63 economists by Bloomberg News taken Dec. 3 to Dec. 10. The world's largest economy grew at a 4.9 percent pace from July through September.

Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power, economists predict.

"The probabilities of a recession have moved up to close to 50 percent -- whether it's above or below is really extraordinarily difficult to tell," Greenspan said.

In a Dec. 13 interview with National Public Radio, he said the economy is "getting close to stall speed." On Nov. 7, he told a conference in Sao Paolo, Brazil, that the chances of a recession were "less than 50-50."

Greenspan said he favors spending government money to rescue Americans who are at risk of losing their homes because they can't make mortgage payments.

Greenspan, speaking on ABC's "This Week" program that aired on Sunday, December 16, said cash bailouts, while creating a larger budget deficit, have the advantage of helping homeowners without distorting property prices or interest rates on mortgages.

"Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this," Greenspan said. "It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely."

Greenspan also noted that the economy is beginning to show warning signs of "stagflation" -- a possibility he alluded to in his latest book, "The Age of Turbulence" -- when slow growth, rising unemployment and inflation all strike at the same time.

"Because of the tremendous geopolitical shifts that occurred at the end of the Cold War, we've had a period of remarkable disinflation," he said. "That period is now coming to an end, and the evidence is clearly there in rising export prices coming out of China. It's showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not 'stagflation,' but the early symptoms of it."

The Federal Reserve has the power to counter these negative forces on the economy, but must be free to act, Greenspan said.

"One of the lessons of the last 20 years especially is that low inflation is the major contributor to economic growth overall, and that fundamentally, inflation must be suppressed," he said. "It's ultimately the Federal Reserve in this country which is the key architect of doing that, and it's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period."


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