Joseph Stiglitz, a Nobel-prize winning economist, said the U.S. economy risks tumbling into recession because of the "mess" left by former Federal Reserve Chairman Alan Greenspan.
"I'm very pessimistic," Stiglitz said in an interview in London today. "Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages."
Stiglitz said there is a 50 percent chance of a recession in the U.S. and that growth will certainly slow to less than half of its 3 percent potential. A worldwide jump in credit costs following the collapse of the subprime mortgage market is choking off finance to American consumers.
Greenspan, in a statement, defended his record and said Stiglitz's three criticisms are "inaccurate or incomplete."
The U.S. home-price surge resulted mainly from the "dramatic" drop in rates on long-term fixed-rate mortgages, which itself resulted from the broader decline in long-term interest rates, Greenspan said. More than two dozen countries have experienced similar price surges and drops in long-term rates, Greenspan said. "The forces driving the boom are clearly global in nature," he said.
When the Fed held its main rate at 1 percent for a year starting in June 2003, the money supply expanded 5 percent, "scarcely the tinder for a housing boom," said the former Fed chairman, who served from 1987 to 2006.
Greenspan added that his 2001 tax-cut support was "contingent" on corresponding spending reductions and that he clarified his comment on variable-rate mortgages in remarks to the Economic Club of New York in March 2004. At that event, he said he meant to suggest that a "narrow segment" of customers might want an alternative to long-term mortgages.
During Greenspan's 18 years in charge of the Fed, the U.S. endured only two recessions, both lasting less than a year, and enjoyed the longest economic expansion in U.S. history. The collapse of the U.S. housing market has thrown a spotlight on the record debt levels that helped to fuel the boom.
After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with a hands-off approach to regulation, has brought Greenspan under fire as the bursting of the housing bubble and the subprime mortgage crisis again threaten to sink the economy.
'Hell of an Economy'
"He did an exceptional job," said Kevin Gaynor, the London-based head of economics and rates strategy at Royal Bank of Scotland Group Plc. "You've got to fight the fire in front of you, not seven years later. Even now, with all of the subprime, this is a hell of an economy."
Greenspan, 81, said on Nov. 7 he predicts a "less than 50- 50" probability of a U.S. recession, reiterating previous remarks made in late October. Home prices in the world's largest economy haven't bottomed out, he said.
"There's a 60 percent risk of recession in the first or second quarter next year," Gaynor said. "That risk is increasing with new data coming out."
Stiglitz, who stepped down as the World Bank's chief economist in 2000, and now works as an author and professor of economics at Columbia University in New York, estimated U.S. consumers borrowed up to $950 billion last year against the value of their homes to finance spending.
"That game is over," Stiglitz said. "As house prices are going down, people are not going to be able to take more money. We are looking at a major slowdown. The impact of that is going to be a very major slowdown, maybe recession."
He also faulted President George W. Bush for cutting taxes in 2001, widening the government's budget deficit and allowing political support for free-market trading to wane.
"The richest country in the world cannot live within its means," Stiglitz said. "It's a real example of macro economic mismanagement. The working out of this global imbalance will cause global problems. The depth of the conviction on free markets in the United States is not very great. We have increased those subsidies, doubled them, under President Bush."
Lowering interest rates now will help the U.S. economy "a little bit, not very much," Stiglitz said, adding that easing terms on mortgage loans would be like "kicking the problem further down the road."
Bush, he said, left "the standing of America around the world at the lowest it's been" by refusing to sign up to the Kyoto treaty on global warming and by fighting the war in Iraq.
"It's so important for there to be a global agreement to curtail the use of oil, the use of carbon," Stiglitz said. "The big failure is for the United States not to go along."