Former Fed Chief Greenspan Says Economy ‘Very Sluggish’

Photographer: Keith Bedford/Bloomberg

Alan Greenspan, former chairman of the U.S. Federal Reserve. Close

Alan Greenspan, former chairman of the U.S. Federal Reserve.

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Photographer: Keith Bedford/Bloomberg

Alan Greenspan, former chairman of the U.S. Federal Reserve.

Alan Greenspan, the former Federal Reserve chairman, said today the U.S. economy “looks very sluggish.”

Greenspan, in a television interview on Bloomberg Surveillance with Tom Keene, also said he sees “global slack” in the economy.

The Fed yesterday extended its Operation Twist program, which will swap $267 billion in short-term securities with longer-term debt through the end of 2012. Fed officials also downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy remain.

“It looks very sluggish to me,” Greenspan said when asked about the U.S. expansion. “We have a two-stage economy in this country.”

Referring to his recent writings, Greenspan said a little over 90 percent of the U.S. gross domestic product comes from producing assets with a life expectancy of less than 20 years. That part of the economy is “doing reasonably well.” He said the other approximately 8 percent, mainly the output of structures including single-family residences, is “down 50 percent.”

Greenspan, when he was asked about issues surrounding the $2 billion trading loss that JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon announced May 10, said that banks are supposed to take risks.

Banker Risks

“Bankers take risks” and “there are going to be failures” as a result, Greenspan said. “You want that type of culture whereby people take risks because unless they take risks you get very little in the way of innovation.”

“Creative destruction is what basically moves a market economy forward,” Greenspan said. “People may not like the destruction part but if you don’t have the destruction part eliminating the obsolescent capital you can’t have the growth.”

Greenspan, who led the U.S. central bank from 1987 to 2006, said he would favor maintaining large banks, if they don’t become “wards of the state.”

In Europe, Greenspan said one of the central issues is that rather than working toward solutions to close the fiscal deficit, world leaders are working on funding it.

“Until we shut off the deficits themselves, debt by definition continues to rise,” he said. “The general focus of policy” is “taking the easy way out with very long-term negative consequences.”

To contact the reporters on this story: Caroline Fairchild in New York at cfairchild2@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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