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SMALL BUSINESS
In an exclusive interview on CNBC, Greenspan said the US economy is holding up "rather well" considering the "extraordinary pressures from the financial sector." But he added that a recession appears inevitable.
"I think we’re right on the brink," he said. "I'd be more surprised if we didn’t than if we did, given the financial state."
Greenspan said the government "had no choice" but to step in and prevent the failure of Bear Stearns and mortgage giants Fannie Mae and Freddie Mac.
•Strategist Sees Oil at $135
• Greenspan Interview, Part One
• Greenspan Interview, Part Two
"You have to do the backstop," he said. "Because once you're at that particular point, your choices are limited."
But he said he was "uncomfortable" with the idea of the Fed getting involved in what he called a "fiscal policy situation" that was really the responsibility of Congress.
He also warned that "Fannie and Freddie are a major accident waiting to happen."
"I think the ultimate solution is a nationalization of both Fannie and Freddie and I hope a restructuring in that nationalization," he said. "And then split them up into five or ten separate entities and sell them back into the market."
He also said that while the priority now is stabilizing the financial system, he is worried about the long-term issue of inflation.
"We will come out of this financial crisis," he said. "But we still have to confront that problem of changing balance between growth and inflation, or what we like to call 'stagflation.'"
Greenspan, who left the Fed in early 2006 and was succeeded by Ben Bernanke, has come under increasing criticism for allowing what many said was easy credit that set up the current financial crisis.
In the interview, Greenspan called the current crisis a "once-in-a-century phenomenon" that went beyond a liquidity crisis and was more what he called a "solvency problem."
"We haven't gotten closure yet," he said. "And it's going to take a while."
2008-07-31 16:39:59