The Federal Reserve Bank didn’t contribute to the coming recession – and, besides, a recession might not be coming after all, Alan Greenspan says.
“The odds are we are going to be OK,” the retired Federal Reserve chairman said here before Thursday’s sharp stock market decline, during a discussion at the annual meeting of LIMRA International, Windsor, Conn.
Despite the implosion of subprime mortgages and the explosion of oil prices, the odds of a recession anytime soon “are less than 50-50,” Greenspan said.
While there is “no question” that the Fed was trying to keep rates low when U.S. home prices started to surge around 2005, high housing prices were seen in more than 30 countries where mortgage rates were in the single digits, Greenspan said.
“So you can’t argue American’s short-term interest rate caused the whole thing,” Greenspan said. What’s more, he said, the vast proportion of mortgages have been fixed rate.
“The rest of the world is doing well,” and it probably would be even stronger if it were not for the surge in oil prices, Greenspan said.
“It’s fascinating we have been able to absorb rising oil prices,” he said. “Even though prices go up, you can see demand has not come down.”
In the long run, “will we see another crash?” Greenspan asked. “Another credit problem? Yes. Can we do anything about them? No. All we can do is make the economy flexible enough to take it.”
Greenspan also talked about the role of the insurance industry in helping the United States accommodate the aging of the baby boomers.
The financial services industry is “critical” to the U.S. economy, he said, and its importance “is rising dramatically.”
Insurance will become especially important as Americans age because income replacement rates under Social Security stand at about 40% of preretirement earnings, Greenspan said.
“Social Security doesn’t do the job, so you have to fill the income gap. It’s going to have to come from the private sector. Annuities, 401(k)s and all those products that offer compound interest will be very large… because the size of the population about to retire is very large.”