By Jesse Herman, contributing editor
When Former Federal Reserve Chairman Allan Greenspan speaks, everyone listens. When he claimed earlier this month there was a “1/3 probability” of a recession, many panicked. Others were outraged claiming that the man, who acted as Chairman for two decades and up until 13 months ago, is now misinformed.
Diane Swonk, chief economist at Chicago-based Mesirow Financial Holding Inc. says things are not as bad as they seem.
“Financial markets are starting to learn that Greenspan is no longer Federal Reserve Chairman,” she said.
Something about that just does not add up for many who have grown to value Greenspan quotes like gold.
On March 2 Current Federal Reserve Chairman, Ben S. Bernanke said he does not foresee any spillover from the rising delinquencies in subprime mortgages. In February he told lawmakers to expect economic growth to accelerate between 2.5% and 3% this year.
Is Greenspan out-of-touch or is he simply being honest during his “post-work” days? Judging by recent quotes, it is unclear whether he knows what to believe or maybe whether he should say what he believes.
“If (housing) prices go down we will have problems,” he said. “Problems in the sense of spillover to other areas.” Does he expect sub-prime mortgage loan issues to spill over into other markets? “I expect to.”
The issue lies with lenders granting subprime loans to people who can’t afford debt repayment. Joined by a housing market with all-time high vacancy rates and continued home building at a record pace, real problems have developed. Or, as the old Former Federal Reserve Chairman Prognosticator implies, we could be facing a recession.
Last month Greenspan told a Toronto audience that these current issues are unlikely to bleed over to other facets of the rest of the economy. Yesterday he said, “It is not a small issue. If we could wave a wand and prices go up 10%, the subprime mortgage problem would disappear.” He went on to say the subprime mortgage market is not likely to cause financial unrest in the rest of the economy.
None of this even touches the soon-to-be retired 78 million baby boomer, which Greenspan refers to as “one of the seminal events in the first part of the 21st century in the United States.”
"There is a significant probability that under existing law, that we have over promised what will be available to Medicare recipients," he said.
Deciphering between the multiple twists and turns of Allen Greenspan’s comments is tough. He has come out making bold statements, then pulls back claiming recession is unlikely.
Reading between the lines, it is apparent concern is justified. Hints of honesty have shown through indicating possible market turmoil. No matter how industry experts “spin” the current economic situation, calling Allen Greenspan out-of-touch seems ridiculous.
Greenspan’s contradictions in recent statements may have to do with initial over dramatization, maybe old-man ignorance or simple recognition of a problem that exists.
No matter, his opinion has been heard. Recanting now due to peer pressure will only makes consumers more suspicious.
