HOUSTON — From the risk of recession to market bubbles, and from oil prices to nuclear power, former Federal Reserve Chairman Alan Greenspan shared his economic outlook in a wide-ranging conversation last night with Cambridge Energy Research Associates (CERA) Chairman Daniel Yergin and an audience of 900 who filled the Westin Galleria ballroom at CERAWeek 2008.
“I think we are clearly on the edge,” of recession, Greenspan said, placing the odds at “50 percent or better,” but noting that because “business was in such extraordinary good shape before this problem hit,” the unavailability of credit hasn’t yet become a major problem for American business. “We are at stall speed in the United States, but haven’t yet seen the discontinuity that characterizes recession.”
“The break in the credit cycle began with the huge surge in sub-prime mortgage originations” which accounted for 20 percent of home sales in 2005 and 2006, and turned into a market bubble with capital gains being used to finance much consumer spending, according to Greenspan. Now, with the capital gains turning negative and the value of sub-prime securities being marked down, the situation will continue until U.S. housing prices stabilize. “We have a long way to go” before that happens, he said.
Nearly 2,000 attendees participated in presentations and seminars during the week-long CERAWeek 2008 event with many of them listening as Greenspan and Yergin discussed lessons from Greenspan’s best-selling book “The Age of Turbulence.”
Other major parts of the economic outlook reviewed by Greenspan and Yergin included:
Oil prices: High oil prices are “a burden now,” but it’s “quite remarkable” that the U.S. economy is able to do reasonably well with oil prices near historic highs. Displacing a significant part of the nine million barrels per day of gasoline and 2 1/2 mbd of diesel fuel used on American highways to electric “will have a large impact on world petroleum demand.”
Nuclear: Going forward “we are going to have to use nuclear energy.”
Climate Change: “Global warming is real, but its solution is going to be much more difficult than we’d like to admit.”
Cap on Carbon Emissions: “A mandatory cap on carbon emissions risks capping energy inputs into GDP, lowering “production and increasing unemployment.”
Technology: “There’s a presumption that we’ll solve this problem with new technologies. I wish that were true.”
Economic Inequality: “I’m a strong advocate of competitive market capitalism. It’s the only viable system through which societies can produce significant material well being. However, with its increasing required conceptual inputs and technology, income inequality has risen. We cannot have a system, no matter how powerful, that doesn’t have the support of the people.”