From: Reuters
Published November 23, 2007 12:21 PM

Greenspan says flexibility cuts risk of recession

By Wojciech Moskwa and Aasa Christine Stoltz

OSLO (Reuters) - The economy's great flexibility has reduced the risk of recession from the subprime mortgage crisis, former Federal Reserve Chairman Alan Greenspan said on Friday.

In remarks to a financial audience in Oslo, he also predicted further falls in U.S. housing prices, saying the market was some way from its selling climax.

Greenspan said bipartisan deregulation of key parts of the U.S. economy, including the financial markets, had made it better able to withstand adverse shocks, ranging from the terror attacks in 2001 to the credit crunch seen in past months.

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"The probability of a recession would be higher than 50 percent if it hadn't been for such a remarkable degree of flexibility," he said.

Greenspan said last month he saw the chances of a U.S. recession at "less than 50 percent."

The U.S. corporate sector, he said, was faring "remarkably well," as were economies in other parts of the world, such as in Asia and Latin America.

But he warned that the U.S. housing market was headed for further decline, undermining already battered credit markets and curbing the "wealth effect" for home-owners.

"The markets are becoming aware that the decline in U.S. housing prices is not stopping. It is at an unprecedented pace compared to the last 50 years," Greenspan said at the event, organized by Norwegian broker First Securities.

He said the housing bubble had burst and the market was "a good deal away" from its selling climax -- a point at which sellers ultimately lower their prices to match lower bids.

This was reflected in the large stock of unsold homes and low turnover, which will be overcome only once people start believing such assets are undervalued.

"We are beginning to see all sorts of asset prices weakening ...(so) where home prices stabilize is critically important for the economic outlook," said Greenspan, who left the Fed in 2006.

WEAKENING DOLLAR

He said the inflationary impact of a weakening dollar had varied over time and central banks needed to address the issue to the extent they believed it affected price stability.

Asked if the Fed should take the weak dollar into account, he said: "To the extent that a weakened dollar is of such a margin that it creates problems, then yes, the central bank needs to address that. One has to ask what are the inflationary consequences of a weakening of the dollar."

He said central banks should concentrate on alleviating the economic fallout from burst asset bubbles because they had few methods to prevent them and "lean against the wind."

(Additional reporting by Richard Solem; Editing by David Christian-Edwards)

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