Apparently, former Federal Reserve Board Chairman Alan Greenspan has gone to the other side of the world to issue his first warnings about a potential recession later this year. In a speech in Hong Kong, he warned that the recovery is getting old and that weakening profit margins could be the first sign of an imminent recession. He also assured his audience that the housing market posed no problem for the economy, with a soft landing producing no spillover effects. Greenspan's comments should warrant some serious media scrutiny. If there is a housing crash driven recession, as some people have predicted, then Greenspan's fingerprints are all over it. He let the housing bubble expand to dangerous levels and ignored the rapid growth in questionable mortgage lending practices. On the other hand, if the business cycle expansion runs its natural course, then no one can blame the former Fed chairman. As far as this latter view, the current recovery is less than five and a half years old, the 90s expansion lasted for ten full years. The 80s cycle lasted for seven and a half years. It seems a bit pre-mature to claim that the recovery is about to die from old age. The profit margin story can't hold water either. The profit peak in the 90s was in 1997, the economy continued to sustain strong growth for 4 more years. With mortgage default rates soaring, the sub-prime segment of the mortgage market tightening rapidly, and inventories of unsold homes at near record levels, it is easy to tell a recession story based on the collapse of the housing bubble. It is not clear that Mr. Greenspan can produce a credible alternative story, but his efforts in this direction deserve serious attention nonetheless.
--Dean Baker