Trust is gradually returning to international financial markets, but there could be a second act to the US subprime crisis in 2008, the former chairman of the Federal Reserve, Dr Alan Greenspan told The Irish Timesthis week.
The plot of this second act will be determined by trends in US house prices, default rates on the $900 billion (€637 billion) of asset-backed subprime mortgages and the response of US consumers to their declining household wealth, Dr Greenspan said.
While too early to call with certainty, the probability of a recession in the US in 2008 ranges between one-third and one-half, he estimates. A recession in the US next year, combined with the current weakness of the US dollar against the euro, would hit the Irish economy hard. The US is Ireland's largest foreign customer and the principal source of foreign direct investment.
The recessionary impulse in the US is stemming from the housing sector, Dr Greenspan says. "The rest of the economy is fine. Corporations' balance sheets are in excellent shape."
Dr Greenspan disputes the contention that the European Central Bank, the Federal Reserve and the Bank of England evinced markedly different responses to the credit crunch. "Observe that all three central banks were very reluctant to come in. They only moved when necessity arose . . . Holding off as long as you can has value. And the value it has is that you reduce the degree of moral hazard," Dr Greenspan said.
As a central banker with almost 19 years' experience, Dr Greenspan says of the Northern Rock debacle: "There's no way to avoid a Northern Rock type of situation. There's always some institution out there which will get into trouble. And you deal with it as best you can. The presumption that you're going to prevent things like Northern Rock happening is just utterly unrealistic - and it may even be undesirable."
He also expands on his views on oil and the invasion of Iraq. In his recent book, The Age of Turbulence, he wrote: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."
