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Video: Greenspan: American economy holding up

CNBC
updated 7/31/2008 4:49:05 PM ET 2008-07-31T20:49:05

Former Federal Reserve Chairman Alan Greenspan said Thursday that the U.S. housing market is “nowhere near the bottom” and that the U.S. economy is “right on the brink” of slipping into a recession. But he told CNBC the latest economic data don’t yet indicate that a recession is inevitable.

Calling the current crisis in the financial markets a "once-in-a-century phenomenon," Greenspan said the Treasury had no choice in its recent moves to backstop the two government-sponsored mortgage finance giants, Fannie Mae and Freddie Mac. But he said the government will probably have to nationalize the two companies, calling them a "major accident waiting to happen."

And he said that the ongoing slide in home prices has wiped out the home equity of “about 12 million homeowners who are basically net in the red.”

“We're still nowhere near the bottom of the home price thing,” Greenspan told CNBC. “And we are looking for that as the critical statistic which will create a balance fundamentally in the economy. Until then I hope we can get sufficiently stable stock price because there is the fundamental source of capital from which we get the ability to recapitalize a goodly part of the financial system, which surely needs it.”

Video: Greenspan: Fannie and Freddie 'unstable' Thursday's report on the gross domestic product, showing a 1.9 percent gain in the second quarter, was encouraging, said the former Fed chairman, because the data showed that companies have done a good job of keeping a tight rein on inventories of unsold goods. Avoiding a build-up of inventories is a “major reason why in the very short term while we're fending off recessionary pressures,” he said.

But regarding the longer-term likelihood of a recession, Greenspan said, “Actually, I think we're probably likely to go there. We're right on the brink. And I would be more surprised if we didn't than if we did, given the financial state.”

Greenspan also said the recent signs of slowing in the rest of the global economy is also a source of concern.

“We depend very critically on that, and that's why I am more inclined toward the recession side than not for the U.S.,” he said.

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