UNCLE AL ON "THIS WEEK"

Here's the entire transcript from Lexis-Nexis. Right at the beginning, Al admits that the middle-class hasn't been doing well.

ABC News Transcript

December 16, 2007 Sunday

SHOW: THIS WEEK 10:12 AM EST

SUNDAY EXCLUSIVE;
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ANCHORS: GEORGE STEPHANOPOULOS

REPORTERS: GEORGE STEPHANOPOULOS (WASHINGTON, DC USA)

LENGTH: 2276 words


GEORGE STEPHANOPOULOS (ABC NEWS)

(Off-camera) And we are now joined by the former chairman of the Federal Reserve, Alan Greenspan.
Thank you for coming on today. Mr. Chairman, he's also the author of "The Age of Turbulence" "The New York Times'" best-seller right now. And I wanted to start out with a response to Senator Edwards. You heard what he had to say about his defense of his populist rhetoric and populist approach. He said average Americans are not winning in this current economy and the policies that we've been following for a long time are part of the reason.

ALAN GREENSPAN
(FORMER FEDERAL RESERVE CHAIRMAN)

He's correct in the fact that there is a stagnation in the middle class economic growth, but his remedies will make it worse, not better, so the critical question that confronts us is to recognize the problem, which is increasing inequality of income which I mentioned in some detail in my book and considered, in fact, a major problem which will be out for an indefinite period of time. We have to address that.

GEORGE STEPHANOPOULOS (Off-camera) You know, I wanted to get into that because you do talk about it a lot in the book. And there was a statistic that came out this week from the Congressional budget office which was just stunning to me. It said that in the last two years from 2003 to 2005 the increase in income for the top 1% exceeded the total income of the bottom 20%. Given that, what would be wrong with letting the tax cuts for the top 1% expire and plowing that money into education which you think is part of the answer?

ALAN GREENSPAN

Well, the problem is fundamentally that our fiscal affairs as we reach out into the next decade are awful, and, indeed, the Congressional Budget Office raised very serious alarms this week, but economists have been raising alarms for a long period of time, so I think we can't look at solutions without looking at the full context of how we're going to resolve the very large shortfall in Medicare and a lesser one in social security and looking at the total picture, because you just can't look at individual problems without a fuller context of where this country is going fiscally.

GEORGE STEPHANOPOULOS
(Off-camera) Well in that fuller context then if you have long-term problems in Medicare and then also in social security, wouldn't it make sense to, in addition to limiting them, as I know you would like to do, to limit the tax cuts and shore up the programs in that way?

ALAN GREENSPAN

Well, I've always said, in fact, as soon as the budget surplus has disappeared, which was in 2002, I said my support for the tax cut was contingent and on pay go actually taking on new meaning that offsetting reductions in spending or other tax adjustments be made in order to finance that specific tax cut. I still hold that true.

GEORGE STEPHANOPOULOS (ABC NEWS

(Off-camera) So when the Congress this week, and it appears like they're going to finalize it this week, fixes this patch in the alternative minimum tax, a $50 or $60 billion hit and doesn't pay for an increase of this deficit, that's something you're against?

ALAN GREENSPAN

Yes.

GEORGE STEPHANOPOULOS (ABC NEWS

(Off-camera) That's a straight answer. Okay, I'll move on to the broader economy right now because there is a lot of concern, as you know, that we may be heading into a recession. Several experts have shared - let me show some of them.

GRAPHICS: RECESSION ODDS

GEORGE STEPHANOPOULOS (ABC NEWS

(Voiceover) Larry Summers, the former Treasury Secretary, says the odds now favor a US recession. Morgan Stanley research, a mild recession is now likely. Both Martin Feldstein and Joseph Stiglitz who were the chief economists for Presidents Reagan and Clinton say there is a 50% chance of a recession now. Are they right?

ALAN GREENSPAN

Well, that the probabilities of a recession have moved up to close to 50%, whether it's above or below is really extraordinarily difficult to tell. I think that's correct. You know what the real story is, with this extraordinary credit problem we're confronting, why the probabilities are not 60% or 70%.

GEORGE STEPHANOPOULOS
(Off-camera) Why aren't they?

ALAN GREENSPAN

The reason which is fascinating, if you look at the data is that because of the decline in long-term rates, interest rates for a protracted period of time, American business was able to fund all of its short-term liability, not all of it, but a significant part of its short-term liabilities and take out low cost long-term debt so that their credit needs as such have not been all that large and so with credit tightening, ordinarily historically that would have been a very major problem for the American economy. It is clearly less so today because consumption expenditures, even though they're being pressed by rising energy prices, are actually moving at a reasonably good clip and the economy, even though it is slowing down and the way I put it going to stall speed, I mean the rate of growth is getting to levels which are such that like a human - like a human system when you get vulnerable, you essentially are open to shocks of one form or another. In other words, when our immune systems go down, we get all sorts of diseases and the economy is similar to that.

GEORGE STEPHANOPOULOS
(Off-camera) But one of the shocks we saw back in 1970 I think for the first time was what became known as stagflation. That's when you had slow growth, rising unemployment and inflation at the same time. And there were some signs this week again that inflation is on the rise. Core inflation is up, wholesale prices had their highest increase, I think, in a generation. That raises the specter of stagflation again. In your book you write that when it hit back in 1970 it put policymakers at a loss. How worried are you about it right now and what should policymakers do?

ALAN GREENSPAN

Well, I'm most concerned about it, as I point out in my book, in the sense that the period that - the last 20 years or so has been a remarkable period in which - without going into any of the tales - because of the tremendous geopolitical shifts that occurred with the end of the cold war, we've had a period of remarkable disinflation. That period is now coming to an end and the evidence is clearly there in rising export prices coming out of China. It's coming out - it's showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not stagflation but the early symptoms of it.

GEORGE STEPHANOPOULOS
(Off-camera) And what do we do about it?

ALAN GREENSPAN

Well, the one thing we can do is to recognize that one of the lessons of the last 20 years especially is that low inflation is the major contributor to economic growth overall, and that fundamentally inflation must be suppressed, and it's ultimately the Federal Reserve in this country which is the key architect of doing that, and it's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period.

GEORGE STEPHANOPOULOS
(Off-camera) Yet we're in the context now of a financial and a housing crisis and you've said that this current crisis isn't going to end until the prices of homes and equity in homes stabilize. Some have pointed out, Paul Krugman in "The New York Times" that right now the historic ratio of price of homes to income and rents is about 30% higher than it is historically. Does that mean we have that far to fall in the housing market?

ALAN GREENSPAN

There's a big dispute as to what the basic level will turn out to be. In my judgment, the prices will stabilize when the rate of liquidation of this very large overhang of newly built single-family homes is at a maximum. Not when we completely get rid of the excess but when we are well under way. Then the market will begin to stabilize and at this stage there is some evidence that sales of homes, new homes, are beginning to flatten out and if we can get a further drop in housing starts and housing construction, we can begin to really liquidate that excess of inventories. When we've got that well in hand then I think prices stabilize and I think the ratios of income to rent to all various other financial aspects is important but not determinate.

GEORGE STEPHANOPOULOS
(Off-camera) But you have said we're in for very large losses and a period of protracted adjustment. What kind of losses are we talking about? How long is it going to take?

ALAN GREENSPAN

Remember, we have $900 billion worth of securitized sub-prime mortgages and almost as much in what we call alternate "A" type of mortgages which are basically undocumented various different types of mortgages. There are going to be significant losses in those numbers, and there are loss ranges now, minimum now is 200 billion, but it's easy by some calculations to get to $400 billion. This is a worldwide...

GEORGE STEPHANOPOULOS
(Off-camera) That's enormous.

ALAN GREENSPAN

It is enormous except we have to remember that as a result of globalization and this extraordinary growth over the last couple of decades, aggregate amount of what we call arbitrageable long-term assets which is all sorts of financial instruments are close to $100 trillion and while $400 billion is a very large number, we have to put it in the context of how much damage it can do in this very huge system.

GEORGE STEPHANOPOULOS (
(Off-camera) The political world is now looking at the immediate pain and Senator Clinton looks - has called for a freeze on foreclosures. Senator Edwards has called for a rescue fund to be set up by the government for people who are facing these kind of foreclosures. What do you think about those ideas?

ALAN GREENSPAN

Well, I think it's important to recognize that there are a very large number of people who are in very major stress and having great difficulty in paying off their mortgages and even when they've tried exceptionally hard. But when you think of how you come to grips with this, it's important to help those people outside - without affecting the mortgage rates and without affecting the structure of markets. Cash is available and we should use that in larger amounts as is necessary to solve the problems of the stress of this...

GEORGE STEPHANOPOULOS
(Off-camera) Cash from the government?

ALAN GREENSPAN

Cash from the government, yes. In other words, if you're going to do that, it's far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it'll drag this process out indefinitely.

GEORGE STEPHANOPOULOS
(Off-camera) But by infusing cash it sounds like you agree with former Treasury Secretary Larry Summers who says that right, given this crisis, there has to be a bias towards activism.

ALAN GREENSPAN

It depends what you mean by activism. If you mean doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that's very costly.

GEORGE STEPHANOPOULOS
(Off-camera) And you think that infusing cash right now would work?

ALAN GREENSPAN
I'm saying I don't know if it would work but it would certainly help people - it would help their incomes, it would help their personal state without affecting the structure of the way markets are behaving and the way the adjustment process is going on. It's very critical that this thing reach a selling climax if I may put it in other words, exhaust itself. It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just really prolongs the agony.

GEORGE STEPHANOPOULOS
(Off-camera) We're just about out of time here and we are in a political season. Which candidate do you think will be best for the economy as president?

ALAN GREENSPAN

Oh, I've taken very strenuous efforts to avoid answering that question.

GEORGE STEPHANOPOULOS
(Off-camera) That's why I have to ask. So - you're not ready to endorse anyone?

ALAN GREENSPAN

I'm not ready to endorse anyone. Indeed, I suspect I - I don't get into that particular game. That's not my business.

GEORGE STEPHANOPOULOS
(Off-camera) Mr. Chairman, thank you very much for coming by this morning.

ALAN GREENSPAN

It's been my pleasure.

GEORGE STEPHANOPOULOS
(Voiceover) The roundtable is next with George Will, Donna Brazile, Jay Carney and Claire Shipman.

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GEORGE STEPHANOPOULOS (
(Voiceover) And later, Brad Pitt.

BRAD PITT (ACTOR)

We chose pink because it screams loud and you get attention. And to say that we can actually turn this around.

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GEORGE STEPHANOPOULOS (Off-camera) The roundtable is coming up plus Brad Pitt after this from our ABC stations.

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