Former Federal Reserve Chairman Alan Greenspan said he favors spending federal government money to bail out mortgage borrowers who risk losing their homes because they can't make payments.
Greenspan's suggested approach differs from that of Treasury Secretary Henry Paulson, who negotiated a freeze on the interest rates of some sub-prime mortgages without pledging any government money to help homeowners or banks.
The former Fed chief also repeated dire warnings about the state of the economy.
Speaking on ABC-TV's
yesterday, Greenspan said cash bailouts, while making the budget deficit bigger, have the advantage of helping homeowners without distorting property prices or interest rates on mortgages.
"Cash is available, and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this," Greenspan said. "It's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely."
Greenspan did not specifically call for a tax cut. Instead, he called for the government to apply money to the severe housing-market slump. Such a cash infusion would typically come through a tax break or a new government spending program.
Greenspan, who was Fed chairman for almost two decades until Ben S. Bernanke took over early last year, repeated that recession risks were rising.
"The probabilities of a recession have moved up to close to 50 percent. Whether it's above or below is really extraordinarily difficult to tell," Greenspan said.
In an interview Thursday with National Public Radio, he said the economy was "getting close to stall speed." On Nov. 7, he told a conference in Saõ Paulo, Brazil, that the chances of a recession in the United States were "less than 50-50."
U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, according to a survey of 63 economists by Bloomberg News taken Dec. 3 to Dec. 10.
The world's largest economy grew at a 4.9 percent pace from July through September.
Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power, economists predict.
President Bush announced this month that Paulson and other members of his administration had reached an agreement with the mortgage industry to help as many as 1.2 million homeowners avoid foreclosure when their adjustable-rate mortgages jump to higher rates.
Working with Paulson and the government's housing regulators, lenders and the companies that manage home loans agreed to freeze some adjustable mortgages at current rates for five years. Others will be given help refinancing or qualifying for loans backed by the Federal Housing Authority.
Greenspan said the key lesson the economy had provided lawmakers over the last 20 years is that inflation must be suppressed for sustained economic growth to occur.
"Core inflation is up. Wholesale prices had their highest increase I think in a generation. That raises the specter of stagflation again," Greenspan said yesterday, referring to a simultaneous stagnant economy and upward pressure on prices.
He said the Federal Reserve should "do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate- and longer-term period."
Greenspan has been criticized by some for keeping interest rates too low for too long after the 2001 recession.