CHICAGO Alan Greenspan said Tuesday that a bloated inventory of new homes has unsettled the U.S. economy but expressed optimism the nation will avoid a recession.
The former Federal Reserve chairman told a group of business and finance executives that chances of a recession are "definitely less than 50-50" but cautioned that great uncertainty remains.
"The next four, five, six months we're certainly going to be slowing down," Greenspan told the Midwest ACG Capital Connection conference. "But the housing thing is a very major issue in how this works out."
He said credit markets are still operating in a "state of fear" rather than the state of euphoria that existed when investors snapped up financial products almost regardless of price.
"Where the problem lies is in home prices new home prices, very specifically," he said. "The question is not so much the housing market per se, but it's the effect of housing on the economy overall."
Homes financed by subprime loans comprised roughly 25 percent of housing starts, Greenspan said, so when the subprime market collapsed a whole segment of the sales market went with it.
The rapid decline in sales caught builders with a lot of their profits tied up in construction or vacant new homes, forcing them to hold "fire sales" that had repercussions elsewhere in the economy.
Greenspan said housing prices stabilize when the rate of liquidation of inventories is at a maximum, and "We've got a long way to go before we get there."
The direction of the housing market will be key to the nation's economic health, he said.
"Whether we get into an actual recession or not, I suspect probably not," Greenspan said. "But the housing thing is a very major issue in how this works out."
The former Fed chairman, who was critical of the Bush administration's spending in his new book, "The Age of Turbulence: Adventures in a New World," took a shot at Washington's increased embrace of corn-based ethanol, which has been heavily subsidized.
"It's a political product, it's not an economic product as far as I'm concerned," he said.
He said cellulosic-based fuels hold more potential, and also endorsed plug-in hybrid vehicles as a way to lessen oil dependency.