Alan Greenspan: A drop in home prices could lead to second recession

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Former Federal Reserve Chairman Alan Greenspan said over the weekend that a decline in home prices could derail an already slowing economic recovery and send the U.S. into a double-dip recession.

Greenspan’s comments, made on Sunday’s edition of NBC’s ‘Meet The Press,’ follow his successor Ben Bernanke’s remarkslast week before Congress that the economy remains ‘unusually uncertain,’ and that the Fed was readying itself to take new measures if the economy deteriorated further.

‘I think we’re in a pause in a recovery, a modest recovery,’ Greenspan said on Sunday’s program. ‘But a pause in the modest recovery feels like quasi recession.’

Economists are increasingly concerned about a renewed decline, with the latest evidence of an economy losing steam coming Friday as the Commerce Department reported lower-than-expected economic growth. Meantime, Greenspan said on Sunday’s program, the recovery has not been distributed equitably, with principally the very wealthy, large corporations and major banks benefiting.

‘Our problem, basically, is that we have a very distorted economy,’ he said, ‘in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is.’

Everybody else -- ‘small business, small banks, and a very significant amount of the labor force’ -- is caught in ‘tragic unemployment’ that is pulling down the country, Greenspan said.

Asked by program host David Gregory if the U.S. could enter a second recession if the housing crisis deepens, Greenspan answered: ‘It is possible, if home prices go down.’

‘Home prices, as best we can judge, have really flattened out in the last year,’ Greenspan said. ‘And while it is true that most economists expect a small dip from here, largely as a consequence of the ending of the tax credit, the data don’t show that at this particular stage. If home prices stay stable, then I think we will skirt the worst of the housing problem.’

Threatening that stability is a growing shadow inventory of homeowners entering default, Greenspan said, which could lead to more foreclosures hitting the real estate market.

Unemployment is also likely to stay elevated this year, Greenspan said. The former Fed chief also said he disagreed with the notion that the Bush-era tax cuts should be extended upon their expiration at the end of the year.

‘I’m very much in favor of tax cuts, but not with borrowed money,’ he said. ‘And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous. And my view is I don’t think we can play subtle policy here on it.’

-- Alejandro Lazo