Tuesday, November 10, 2009

 

Greenspan Says Stock Market Rally ‘Re-liquifying’ U.S. Economy


By Sonja Franklin

Nov. 9 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said a rebound in stocks is “re-liquifying” the U.S. economy and housing prices are showing early indications of ending their decline.

“We have been very fortunate that the stock markets moved back” and are “re-liquifying the whole process,” Greenspan said at an event in Edmonton, Alberta, presented by Abu Dhabi National Energy Co., the state-controlled energy producer known as Taqa.

The Standard & Poor’s 500 Index advanced 2.2 percent to 1,093.08, a sixth straight day of gains, and is up 62 percent from its low for the year on March 9. The Dow Jones Industrial Average added 203.52 points, or 2 percent, to 10,226.94, the highest close in 13 months.

The world’s largest economy is feeling the “maximum impact” now from the federal government’s $787 billion in fiscal stimulus, Greenspan said. He said a rebound in house prices might help avert another wave of foreclosures.

“It may be too soon, but all the relevant price indexes are turning,” Greenspan, 83, said. “Now whether or not that is temporary is very difficult to tell, because we have never been through anything like this.”

A gauge of home prices in 20 U.S. cities rose in August for a third consecutive month. The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said Oct. 27.

Greenspan was appointed Fed chairman in 1987 by then- President Ronald Reagan and served until January 2006. He was succeeded by Ben S. Bernanke.

U.S. Growth

In the third quarter, gross domestic product expanded at a 3.5 percent annual rate after a yearlong contraction, Commerce Department figures showed Oct. 29. Household purchases increased 3.4 percent, the most in two years.

Greenspan said inventories are being drawn down as the economy recovers. Manufacturers will need to rev up production lines to prevent stockpiles from being depleted, he said.

“An ever-increasing part of your consumption must be met by industrial production,” rather than from inventories, he said, adding that this phase may extend into the second quarter of 2010. After that, the economic outlook “is going to depend to a very significant extent on what stock prices do.”

Through stocks comes a “wealth effect” from realized capital gains, he said.

Job Losses

U.S. payrolls fell last month more than the median forecast of economists surveyed by Bloomberg News, and the unemployment rate jumped to a 26-year high of 10.2 percent, according to a government report last week. The figures bolstered expectations the Fed is more likely to maintain its pledge to keep interest rates near zero.

The economy has lost 7.3 million jobs since the recession began in December 2007, the biggest drop since the Great Depression.

U.K. Chancellor of the Exchequer Alistair Darling, hosting a meeting of finance ministers from Group of 20 nations, said on Nov. 7 his colleagues decided to keep interest rates low and maintain record budget deficits until economic recoveries take hold.

Greenspan said the U.S. needs to address the country’s budget deficit.

“Our capacity to sell U.S. Treasury issues was never in doubt because we had a very significant cushion between federal debt on the one hand and the capacity to borrow on the other.”

With budget shortfalls projected, “that cushion is narrowing,” he said. “We are in a position where we have got to reign in” the national debt.

To contact the reporter on this story: Sonja Franklin in Calgary at sfranklin6@bloomberg.net

Last Updated: November 9, 2009 17:29 EST

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCyPFlcZdck8&pos=4

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