Greenspan Sees Steep Decline In U.S. GDP

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(CBS/AP) Former Federal Reserve Chairman Alan Greenspan said Friday there is no doubt the world economy is in a very severe recession and that U.S. gross domestic product will decline significantly in the last three months of the year.

Speaking at a business lunch in Toronto, Greenspan said the economy is not quite in a free fall but something close to it.

"That we are in a recession, very severe, there's no question," Greenspan said. "Gross domestic product in the United States in the fourth quarter is going to be down significantly."

The former Fed chairman said early data for October show the GDP in a severe contraction that could top a 3 percent annual rate of decline.

"We know we are going down and there's very little we can do about that," Greenspan said.

U.S. home prices and stock prices are critical, he noted. Housing values might have another 5 to 10 percent to decline before they bottom, which could come sometime in the first half of next year, he said.

"It's important to recognize we are not in quite a free fall but something close to it," Greenspan said. "This economy, and indeed the world economy, has tilted over and is moving down fairly aggressively, pretty much across the board."

On Wall Street Friday buyers returned after two days of heavy losses, mindful of the economy's growing problems but attracted by stocks' lower prices. Analysts said the advance, which also came amid relief that a bad report on unemployment wasn't worse and followed dour third-quarter reports from Ford and General Motors, was to be expected as Wall Street experiences a rocky recovery from October's devastating selling.

The major indexes jumped more than 2 percent, including the Dow Jones industrial average, which rose 250 points in light trading. For the week, the Dow and broader benchmarks like the Standard & Poor's 500 index lost about 4 percent after surging 10 percent or more last week.

The market briefly came off its highest levels of the session after President-elect Obama reiterated there is a great deal of hard work to be done to restore the economy to health. Investors had optimistically sent prices higher, only to temporarily pull back when Obama underscored what they already know: that the economy's problems won't be easily solved.

The broader S&P 500 index added 26.11, or 2.89 percent, to 930.99, and the Nasdaq composite index rose 38.70, or 2.41 percent, to 1,647.40.

Greenspan, who was the head of the U.S. central bank for 18 1/2 years before stepping down in 2006, said stock prices are important because higher prices increase equity and improve balance sheets.

"If the value of equity goes up, that amount of capital is available to be disbursed most anywhere," he said. "Stock prices tend to lead to recovery. There comes a point where the market gets exhausted on the downside and that to me is going to be a very critical variable as to when we actually turn it around. There's no way of preventing what's going on now. That was caused by the shock of the financial system a couple of months ago."

Greenspan, 82, described it as a once-in-a-century event.

He said the current pattern has all the characteristics of a market bottom.

"All bottoms look like what we're looking at now, but it doesn't follow that this bottom always leads to a recovery," he said. "It may just be another stage before you go down again, and I'm not going to forecast where we are going because I frankly don't have a clue."

In his testimony before the U.S. House Oversight Committee last month, Greenspan acknowledged that the crisis has exposed flaws in his thinking and in the workings of the free-market system.

He said then that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had been proven wrong by the current crisis. He called this a "mistake" in his views and said he had been shocked by that.

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