The economy is most likely in a pause, but a double-dip recession can’t be ruled out, says former Federal Reserve Chairman Alan Greenspan.
He also opposes the financial reform bill in its present form, saying it would slash bank lending.
As for the economy, “Of course, there’s a possibility (of a double dip),” Greenspan told CNBC.
But then again, the ex-Fed chairman is famous for taking both sides of an issue. “The trouble is there are always possibilities in both directions when you’re dealing with the economy.”
Things were looking pretty good through May, and then the economy hit an “invisible wall,” Greenspan said.
In June, industrial production flattened out, after a 1.2 percent increase in May, and inventory accumulation stopped, he points out.
That made Greenspan very concerned about July, but early statistics are more encouraging, he says. Weekly industrial production and rail car loadings data point to a “slight uptick” for the first week of the month, he says.
“I don’t know whether this is the end of a pause (for the economy),” Greenspan said.
“I can’t say definitely this is only a pause, because this is the aftermath of the greatest global financial crisis ever. You have to be skeptical of any forecast that comes off that type of shock. But if I had to bet, I’d say it’s a pause.”
Perhaps the most important factor behind that assessment is the stock market’s rebound in recent days, Greenspan says. The Dow Jones industrial average has bounced up 5.3 percent from its July 2 low.
“A lot of people think of stock market gains as paper profits. I think that’s putting the wrong slant on it,” he said. “Stock prices are actually causing the economy to do what it’s doing.”
The economy grew 2.7 percent in the first quarter.
And what does Greenspan think of the Dodd-Frank financial reform bill?
Significant changes in it are necessary, he says. “As it stands now, I’d be very uncomfortable seeing it become law, because I think we will have another bill a year from now,” he told Bloomberg in an interview.
For example, the consumer protection portion of the bill will indeed do well at safeguarding consumers, “eliminating many of the egregious actions that were taking place,” Greenspan says.
“But it will subsequently eliminate lending.”
Greenspan may get his wish. The Democratic leadership is having trouble gaining Senate approval for the bill.
Meanwhile, as the U.S. economy posts dismal economic data — putting the ominous possibility of a double-dip recession at the top of Wall Street's talking points — some money managers are saying that assessment would be premature.
"Right now the market is responding to this fear, and double-dip is in the air ... but is it verified in the statistics? And in that case we are saying 'No, there is no double-dip,'" Milton Ezrati, senior economist and market strategist at Lord Abbett, in Jersey City, N.J., told Reuters.
"Particularly in an environment like this it is very dangerous because the market picks up the talk and it will give a lot of false signals," Ezrati said, referring to the influence grim economic data can have on stock markets and vice versa.
Risks of a double-dip have increased, managers admit, as employment and housing have failed to rebound, and, akin to the eternal chicken vs. egg debate, corporate earnings estimates are being revised downward in anticipation of sluggish growth.
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