U.S. MBA Mortgage Applications Index Soared 17% Last Week

By Jennifer Ryan

Sept. 9 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.K. economy will be slow to rebound from the worst contraction in a generation after the collapse of world trade battered exports.

“It’s going to take a long while for you to work your way through this,” Greenspan, who serves as an informal adviser to U.K. Prime Minister Gordon Brown, told the BBC in an interview published on its Web site. “Britain is more globally oriented as an economy.”

Greenspan’s warning comes a week after the Organization for Economic Cooperation and Development projected the U.K. would be the only member of the Group of Seven nations not to have any quarter of growth this year. U.K. exports have shrunk for five quarters as the credit crisis tipped the global economy into its deepest slump since World War II following last year’s bankruptcy of Lehman Brothers Holdings Inc.

“The dramatic decline in exports globally and trade generally following the collapse of Lehman Brothers had dramatic effects in the financial system of Britain,” said Greenspan, who received an honorary knighthood from Queen Elizabeth II in 2002.

Bank of England Governor Mervyn King said on Aug. 12 that the U.K. may be heading for a “relatively slow recovery,” although Chancellor of the Exchequer Alistair Darling predicts growth will resume around the end of this year. The National Institute of Economic and Social Research, whose clients include the central bank, said today that the economy probably grew 0.2 percent in the three months through August, compared with a decline of 0.3 percent in the three months through July.

Policy Makers

Bank of England policy makers meeting today and tomorrow will probably decide to continue a plan to buy 175 billion pounds ($289 billion) of bonds with newly created money in a bid to stoke growth.

The Paris-based OECD, which seeks to coordinate policy across its 30 member nations, said on Sept. 3 that it projected the U.K. economy will contract 1 percent in the current quarter before stagnating in the final three months of the year. It cut its forecast for the full year to show a slump of 4.7 percent compared with 4.3 percent estimated in June. That made it the only G-7 economy for which the OECD’s outlook deteriorated.

Once regarded by some observers as the greatest central banker, Greenspan has seen his legacy criticized since the U.S. subprime-mortgage market collapsed in 2007, triggering a global crisis that has led to $1.6 trillion of writedowns and credit losses for financial institutions.

Under-Pricing Risk

The current crisis stemmed from bankers under-pricing risk and betting they would know when the tide turned, Greenspan said. “I fear too many of them thought they would be able to spot the actual trigger point of the crisis in time to get out,” he told the BBC.

Even as the current turmoil ebbs, Greenspan repeated that the world economy would always face periods of turbulence and recommended capital requirements be increased at banks as a buffer. While the next crisis may be different, it will still originate from the “unquenchable ability” of people to believe prosperous times are endless, he said.

“The crisis will happen again, but it will be different,” Greenspan said in the interview.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net