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By Lily Nonomiya and Scott Lanman
April 8 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the current credit crisis is the worst in at least 50 years.
``The current credit crisis is the most wrenching in the last half century and possibly more,'' Greenspan told a conference in Tokyo today via satellite from Washington.
Greenspan's remarks echo the assessments of economists including those at the International Monetary Fund, and may add to pressure on policy makers to strengthen their response to the credit crunch. Federal Reserve officials last week acknowledged that capital markets remain distressed even after the fastest interest-rate cuts in two decades.
Greenspan, 82, said the extent of damage stemming from the collapse of the subprime-mortgage market won't be known for months.
``Have we reached a point where prices are stable? We cannot know that for a couple of months,'' he said. He added that prices may begin to stabilize by the start of 2009 as home inventories decline.
The yield on the 10-year note fell 1 basis point to 3.53 percent as of 10:07 a.m. in Tokyo, according to bond broker Cantor Fitzgerald LP.
Greenspan said inflation will be contained during the current slowdown before picking up as the world economy recovers momentum.
Economic Slack
``It's difficult to imagine any major breakout of inflation as economic slack continues to increase,'' he said. ``What we will see is gradually rising inflationary pressures that will probably be subdued during the current period of slack, but that will surely reemerge when economies pick up.''
Greenspan delivered his remarks via satellite from Bloomberg Television's studio in Washington, answering questions from Peter Hooper, chief U.S. economist at Deutsche Bank AG, which hired Greenspan as a consultant in August.
The IMF cut its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst U.S. financial crisis since the Great Depression, according to a document obtained by Bloomberg last week.
Greenspan, who retired in 2006 after 18 years as the U.S. central-bank chief, has come under increasing criticism for his policies as last year's subprime-loan meltdown spread into a broader financial crisis. One recent book, ``Greenspan's Bubbles'' by money manager William Fleckenstein, argues the former Fed chief helped inflate stock and home prices.
Left to Bernanke
Greenspan, in response to the bursting of the Internet and technology bubble and the Sept. 11 terrorist attacks, lowered the Fed's key rate in 2001 from 6.5 percent to 1.75 percent, then reduced it further in 2003 to 1 percent, a 45-year low.
He left the rate there for a year before starting to raise borrowing costs in quarter-point increments, leaving it to his successor, Ben S. Bernanke, to decide when to stop. Some Fed critics, such as Bear Stearns Cos. economist John Ryding, say rates were too low for too long, encouraging the easy credit that helped inflate a housing bubble and has now returned to burn investors.
Greenspan, who published his memoir ``The Age of Turbulence'' in September, has taken to defending his legacy in newspaper opinion articles.
Yesterday, in a Financial Times piece headlined ``The Fed is blameless on the property bubble,'' Greenspan wrote that the evidence is ``very fragile'' that Fed interest-rate policy added to the U.S. bubble and that ``it is not credible that regulators would have been able to prevent the subprime debacle.''
Bear Stearns Rescue
Fed officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during Greenspan's tenure.
After last month's near-collapse of Bear Stearns, Minneapolis Fed Bank President Gary Stern -- the longest-serving policy maker -- said in a March 27 speech that it's possible ``to build support'' for practices ``designed to prevent excesses.''
New York Fed President Timothy Geithner, whose district bank took on about $30 billion of Bear Stearns assets to rescue the firm, argued two years ago for a larger role for asset prices in decision making, and there's no indication his views have changed.
Greenspan, in yesterday's FT piece, reiterated his doubts about taking a more active role in leaning against asset bubbles.
At least 14 banks and securities firms have sought cash from outside investors in the past year after more than $230 billion of global markdowns and losses caused by the collapse of the U.S. subprime mortgage market, data compiled by Bloomberg show.
Recession Risk
Bernanke, 54, told Congress last week that the U.S. economy may contract in the first half of 2008 and for the first time acknowledged the chance of a recession.
Later today, the Fed releases minutes of its March 18 interest-rate decision and any other conference calls in February and the first half of March. The Federal Open Market Committee that day lowered its benchmark interest rate by 0.75 percentage point to 2.25 percent, capping a cumulative 3 points of cuts since September.
To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net
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