HOUSTON - Former Federal Reserve Chairman Alan Greenspan said Thursday night the American economy is "clearly on the edge" of a recession, and he pointed to the depressed housing market as a primary culprit.
In dinner remarks to about 1,100 energy industry executives, academics and others, Greenspan said the odds are 50 percent or better the country is headed toward a recession. His prediction came several hours after his Federal Reserve successor, Ben Bernanke, told Congress the economy is deteriorating, but he still looks for slow growth as 2008 transpires.
Greenspan said the reason the recent credit crunch — triggered by the subprime lending debacle — hasn't hit U.S. businesses particularly hard is because they've been operating in a time of high cash flows, minimizing their need for such credit options.
"If it weren't for the fact that business was in such extraordinary good shape before this problem hit, I don't think we'd be questioning at this stage whether we're in a recession," Greenspan said during a question-and-answer session with Daniel Yergin, chairman of Cambridge Energy Research Associates, the Massachusetts-based consultancy that sponsored the dinner.
"We'd be talking about how long and how deep," he said. "And we're not there yet."
Greenspan, 81, gave no prepared remarks.
The collapse of the housing market, sour mortgage investments and much harder-to-get credit are weighing heavily on the economy. Foreclosures have hit record highs, and banks have racked up multibillion-dollar losses.
Greenspan said he thinks the housing market will continue to erode until the cause of the deterioration ends.
"Where all the problem is coming from is the continuous marking down of the value of those subprime securities," he said. "Until we stabilize the price level of homes ... you're going to continuously get loss estimates" from banks and other financial institutions.
When might the housing crisis hit rock bottom, Yergin asked.
The country still has "a long way to go," Greenspan responded.
In a speech a few weeks ago in Canada, Greenspan also said the odds of a U.S. recession were 50 percent or "slightly more."
On that occasion, he said subprime mortgages were "a valuable product" that helped increase home ownership in the U.S., especially among minorities.
However, he said what began as a niche part of the mortgage market grew as hedge funds sought out the collateralized paper associated with the loans.
Greenspan said recently it was the repackaging and sale to investors of the risky home loans — not the subprime loans themselves — that were to blame for the global credit crisis.
Earlier Thursday, Bernanke told the Senate Banking Committee the one-two punch of housing and credit crises has strained the economy, and he forecast sluggish growth in the near term.
Given all the dangers facing the economy, he said, the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."
The Federal Reserve, which started lowering a key interest rate in September, has recently turned much more aggressive. Over the span of eight days in January, it slashed rates by 1.25 percentage points — the biggest one-month rate reduction in a quarter-century. Economists and Wall Street investors believe the Fed will cut rates even more at its next meeting in March and probably again in April.
Under Greenspan, the U.S. Federal Reserve slashed interest rates between early 2001 to the summer of 2003 to their lowest level in decades.
Critics have complained Greenspan failed to act in his role as a regulator during the subsequent housing boom in the U.S., as easy credit spurred subprime home loans.
The former Fed chairman, who served in the role for 19 years — from 1987 to 2006 — has acknowledged he failed to see early on the potential danger of the increase in mortgages to people with questionable credit histories.
Greenspan now works as a private consultant for firms through his company, Greenspan Associates LLC.
He also has a best-selling new book, "The Age of Turbulence: Adventures in a New World."