See no room for Freddie, Fannie-like cos: Greenspan

Q: In public speaking you have long said that government should not be bailing out; financial market should not be bailing out companies. Now perhaps Fannie and Freddie with this implicit backing, is a different story but you have a new epilogue to your memoir talking about giving the government new powers to handle troubled companies to minimize the risks such as the situation with Bear Sterns. Explain what you are talking about - you would like new powers to minimize the risk of troubled companies - in what way do you see this playing out?

Greenspan: First of all one should remember that we have a fiat money system. This essentially means that at a minimum, government must intervene for the process of maintaining money supply because when we went off the Gold Standard, which was an automatic mechanism, we essentially created the discretionary money system. Therefore what has often happened in this particular case and indeed happened with respect to Bear Sterns was that the Central Bank moved in using its balance sheet in order to essentially transfer what is private credit into sovereign credits and that can occur effectively as it did indeed with Bear Sterns. As I envisaged it at the time, there really was no alternative. If Bear Sterns had been allowed to cave with its extraordinary labyrinth of inter-relationships to all parts of the financial community, there is no question it would have been a very severe problem.

Q: Mr Greenspan we have been talking specifically about the financial services area and the crisis that we are all faced with. Let me ask you broadly about the economy, get your reaction to the most recent Gross Domestic Product (GDP) report - 3.3% growth; last time we were together you said that this deal is a 50-50 chance that the US would go into recession. Do you still stand by that statement?

Greenspan: I said 50% or more and I still stand by that statement. I think the real interesting question at the moment with all of this financial problem is -why is the economy in a world still in positive territory. United States is weakening obviously and its stagnant but we are holding up and the developing world while coming down from its dramatically rapid rates of increase, has slowed as well.  The real interesting question is why are we doing as well we are.

Q: What about the issue of inflation because a lot of people say - look we are watching an issue put on a sidelines because we are also faced with the capital issue and the credit crisis and yet we have got inflation all around the world, we have got inflation even in the United States. Should the Fed be more focused on inflation and I am not asking you to comment on Ben Bernanke’s performance, I know you don’t want to do that and there is no reason for you to do that. But should the Fed be focused more on inflation?

Greenspan: I think we are undergoing a very extraordinary post-cold war phenomenon, which has led to a disinflationary process for number of years but it is now turning. If we warrant for such extraordinary pressure we are getting from the financial sector, we would see the emergence of inflationary forces and I do expect that to happen after the crisis is over. But obviously, during the crisis there is a very little way in which inflation could come up because the pressures are particularly towards slower growth and slower inflation. But when we get beyond this, I think we will see a real emergence of inflation, which we have not seen for years.