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Greenspan says recession still possible after Fed cut

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Former Federal Reserve Chairman Alan Greenspan said the odds of a recession remain "somewhat more" than one in three even after this week's cut in interest rates, with home prices likely to drop further and hurt consumer spending.

"Remember, we still have a problem out there, which is a large overhang of unsold newly constructed homes," Greenspan said in an interview today following the publication of his book, "The Age of Turbulence: Adventures in a New World." Home prices "are down only about 3 percent, but they are clearly moving lower."

Greenspan was less sanguine than President George W. Bush and Treasury Secretary Henry Paulson, who expressed confidence the economic expansion will continue. Paulson, appearing at a congressional hearing with Fed Chairman Ben S. Bernanke, said the rate cut "helped stabilize financial markets." The Fed chief said policy makers took the action to ensure "moderate growth."

The former central banker also backed the reappointment of Bank of England Governor Mervyn King, who is facing criticism for his handling of the U.K.'s worst banking crisis in three decades. He predicted that French President Nicolas Sarkozy will fail in his lobbying of the European Central Bank to lower interest rates.

The French leader is "wrong on this particular question," Greenspan, 81, said. "I don't think he will succeed."

Greenspan, who in March estimated there was a "one-third probability" of a U.S. recession this year, said home values are "very important" because they contribute to household wealth and support borrowing to finance consumer spending. Prices are unlikely to drop more than 10 percent, he said.

The Fed on Sept. 18 lowered its benchmark rate by half a percentage point, saying tougher credit standards had the potential to hurt economic growth. Economists said this week's action was similar to Greenspan's approach in taking preemptive measures to reduce the risks of recession.

Policy makers "will act as needed to foster price stability and sustainable economic growth, Bernanke said in testimony to the House Financial Services Committee today, echoing the Fed's statement earlier this week.

Paulson told lawmakers at the hearing that "although the recent reappraisal of risk, coupled with weakness in the housing sector, may well result in a penalty, the fundamentals point to continued U.S. economic growth."

"The fundamentals of our nation's economy are strong," Bush said today at a White House press conference. "Inflation is down, job markets are steady and strong."

By contrast, Greenspan suggested a future hit to household spending.

"To the extent we see a flattening out of the net worth of households, we would expect to find some erosion in consumer expenditures, but we haven't seen it yet," Greenspan said.

The former Fed chairman said in an earlier interview on CBS's 60 Minutes program that he had more flexibility to lower rates as chairman than his successor Bernanke does, because inflationary pressures today are a greater threat.

The Fed's Open Market Committee cut the federal funds rate, which banks charge each other for overnight loans, a half point to 4.75 percent, a bigger reduction than expected by most of the 134 forecasters in a Bloomberg News survey. The Fed said in its statement that it "will act as needed to foster price stability and sustainable economic growth."

Greenspan helped guide the longest economic expansion in U.S. history, lasting from 1991 to 2001. Growth averaged a 3 percent annualized rate during the former Fed chief's tenure.

Greenspan served as Fed chairman from 1987 until his retirement in January 2006. Before that, he was a private economist in New York, advising many of the biggest U.S. companies.

The former Fed chief reiterated he was wary of the Fed taking part in regulating the mortgage market, adding "I don't know the answer" of whether it is proper for the central bank to increase regulation of the market.

Bernanke indicated no doubts today, repeating a pledge to lawmakers to come up with new consumer protections.

"We are looking closely at some mortgage lending practices," Bernanke said in his remarks. "We will use our rulemaking authority" to "propose additional consumer protections later this year."

Greenspan said "it is fundamentally a job for state attorneys general," he added, citing fraud as a particular problem. "I think what you need is experts in criminal acts."

After the 2001 recession, the Greenspan Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with Greenspan's hands-off approach to regulation, have brought him under fire. Critics say they helped inflate a housing bubble, creating conditions for the subprime mortgage crisis that threatens to sink the broader economy.

Former Fed Governor Edward Gramlich, who died earlier this month, had pushed Greenspan to strengthen oversight of banks during the record U.S. mortgage boom from 2004 to 2006.

The central bank historically favored refraining from dictating rules, focusing instead on disclosure and education so borrowers can make their own informed decisions.