Greenspan Sees Sharp Drop in U.S. Q-4 GDP

U.S. gross domestic product will drop sharply in the fourth quarter, but hard-hit housing prices may start to stabilize in the first half of next year, former U.S. Federal Reserve Chairman Alan Greenspan said on Friday.

"We are in not quite a freefall but something fairly close to that," he told a business audience in Toronto, noting that there is no question that the United States is in a severe recession and that U.S. gross domestic product will drop significantly for the fourth quarter.

"It's clear, just looking at the trend in the monthly gross domestic product, it's sliding at an over 3 percent annual rate, and indeed the early data for October suggest that it's even more severe than that," he said.

"We know we're going down, and there's very little we can do about that."

The U.S. economy shrank 0.3 percent in the third quarter, the sharpest contraction in seven years, and payrolls data on Friday showed the U.S. jobless rate jumped to 6.5 percent in October, its highest level since March 1994.

In a wide-ranging question and answer session, the former Fed chief said U.S. housing prices could fall another 5 to 10 percentage points before stabilizing sometime in the first half of 2009.

"The rate of (single-family house) liquidation is apparently picking up rather aggressively, and it's that which will ultimately stabilize prices, not immediately but sometime in the first half of next year," Greenspan said.

This will allow financial institutions to more accurately value their housing-related assets, he noted.

Greenspan, who left the Federal Reserve in 2006, told the U.S. Congress in late October that he had been "partially" wrong to resist the oversight of derivative instruments, specifically credit default swaps, which are meant to act as insurance against bond defaults.

He did not elaborate on that on Friday, but said the Fed had considered regulating subprime mortgage lending in 2000, but foreclosures and delinquencies in that small segment of the mortgage market were low for several years.

A 2005 jump in demand for securities backed by subprime U.S. mortgages spurred looser standards and greater lending to riskier borrowers, he said.

"Were we right in not moving forward on regulation of subprime mortgages? One doesn't know...and we hadn't the slightest inclination at the time that the securitization problem would become so gross."

Greenspan said he is closely watching the U.S. housing market, overnight bank lending rates and global stock markets for insight into the economic recovery.

The current stock market pattern has "all the characteristics of a bottom" but he did not go so far as to call one, saying that markets may drop further.

While government intervention in the financial system has been necessary, Greenspan said similar efforts should not be repeated for nonfinancial industries.

"It's important that we not replicate in the nonfinancial area the type of subsidization that we, of necessity, were required to do to stabilize the financial system, which has at its root the fundamentals of systemic risk," Greenspan said. Individual industries do not have that same risk, he added.

He did not refer to specific industries, but cash-strapped U.S. auto manufacturers, suffering from a collapse in sales, have said their industry needs urgent government help.