HOST GEORGE STEPHANOPOULOS: Several … say that there is a 50 percent chance of a recession now. Are they right?

GREENSPAN: Well, that 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. I think that’s correct. You know what the real story is, with this extraordinary credit problems we’re confronting, why the probabilities are not 60% or 70%?

STEPHANOPOULOS: Why aren’t they?

GREENSPAN: The reason, which is fascinating, if you look at the data, is that because of the decline in long-term rates, interest rates for a protracted period of time, American business was able to fund … [a] significant part of its short-term liabilities, and take out low-cost, long-term debt. So the debt credit needs as such have not all been all that large, and so with credit tightening, ordinarily historically that would have been a very major problem for the American economy. It is clearly less so today, because consumption expenditures, even though they’re being pressed by rising energy prices, are actually moving at a reasonably good clip, and the economy, even though it is slowing down — and the way I put it going to stall speed. I mean, the rate of growth is getting to levels which are such that like a human — like a human system when you get vulnerable, you essentially are open to shocks of one form or another. In other words, when our immune systems go down, we get all sorts of diseases. The economy is similar to that.

STEPHANOPOULOS: One of the shocks we saw back in 1970 I think for the first time was what became known as stagflation…How worried are you about it right now, and what should policymakers do?

GREENSPAN: Well, I’m most concerned about it, as I point out in my book, in the sense that the period that — the last 20 years or so has been a remarkable period in which — without going into any of the details — because of the tremendous geopolitical shifts that occurred at the end of the Cold War, we’ve had a period of remarkable disinflation. That period is now coming to an end, and the evidence is clearly there in rising export prices coming out of China. It’s coming out — 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.

STEPHANOPOULOS: And what do we do about it?

GREENSPAN: Well, the one thing we can do is to recognize that 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. And 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.

STEPHANOPOULOS: Some have pointed out … now the historic ratio of price of homes to income and rents is about 30 percent higher than it is historically. Does that mean we have that far to fall in the housing market?

GREENSPAN: There’s a big dispute as to what the basic level will turn out to be. In my judgment, the prices will stabilize when the rate of liquidation of this very large overhang of newly built single-family homes is at a maximum. Not when we completely get rid of the excess, but when we are well under way. Then the market will begin to stabilize. And at this stage, there is some evidence that sales of homes, new homes, are beginning to flatten out. … And if we can get a further drop in housing starts and housing construction, we can begin to really liquidate that excess of inventories. When we’ve got that well in hand, then, I think, prices stabilize. And I think the ratios of income to rent to all various
other financial aspects is important but not determinate. There are going to be significant losses [on Subprime and Alt-A mortgages]. And there are loss ranges, now — the minimum, now, is $200 billion. But it’s easy, by some calculations, to get to $400 billion.

STEPHANOPOULOS: That’s enormous.

GREENSPAN: It is enormous — except, we have to remember that, as a result of globalization and this extraordinary growth over the last couple of decades, aggregate amount of what we call arbitragable long-term assets, which is all sorts of financial instruments, are close to $100 trillion. And while $400 billion is a very large number, we have to put it in the context of how much damage it can do in this very huge system.

STEPHANOPOULOS: The political world is now looking at the immediate pain. And Senator Clinton looks — has called for a freeze on foreclosures. Senator Edwards called for a rescue fund to be set up by the government for people who are facing these kind of foreclosures. What do you think about those ideas?

GREENSPAN: It’s important to help those people … without affecting the mortgage rates and without affecting the structure of markets. Cash [from the government] is available and we should use that in larger amounts. … 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.

STEPHANOPOULOS: But by infusing cash, it sounds like you agree, then, with former Treasury secretary Larry Summers, who says that, right now, given this crisis, there has to be a bias toward activism.

GREENSPAN: It depends what you mean by activism. If you mean
doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.