WHEN America gets a cold, the world sneezes. From that old chestnut it follows that the difficulty in which the world economy finds itself was made in America. Then it is an easy jump to blaming it all on the former Federal Reserve Board chairman Alan Greenspan. After all, the argument goes, he kept interest rates too low for too long, creating a housing bubble that has now burst, causing woes in credit markets and wipe-outs at the leading global banks.

Even former central bankers deserve the chance to put their side of an argument, so I rang Alan to give him that opportunity. Ever gracious, he took me through a very convincing demonstration that the chickens that are now coming home to roost were not hatched at his Federal Reserve Board meetings.

“If central bankers could alter asset prices we should. But the evidence very strongly suggests that we can’t,” he said. “I don’t know of any examples of a central bank successfully controlling asset prices.”

He cited, for one, his experience in 1994 when the Federal Reserve raised interest rates by three percentage points (300 basis points in City jargon) to fight inflation. Share prices did flatten, but only briefly, and then resumed their rise.

The house-price bubble began in earnest in 2004, and not only in the United States. Global forces were at work that kept long-term interest rates low, driving house prices up in more than 20 countries, and faster in Britain, Spain and Australia than in America.

Greenspan pointed out that the emergence of large parts of the world economy from the stultifying effect of central planning, the establishment of property rights and some form of the rule of law in China and elsewhere, caused incomes in developing countries to soar at twice the rate of the developed world. Citizens of those countries saved huge portions of their incomes, which drove long-term rates down, and in America kept them from moving “sympathetically” with the short-term rates set by the Greenspan Fed.

In short, nothing the Fed could do would drive up the global long-term rates that determine the level of demand for houses and hence their price.

But, I asked, didn’t your support for adjustable-rate mortgages add fuel to the fire by bringing new buyers into the housing market?

He pointed out that press reports of his discussion of some advantages of adjustable-rate mortgages in 2004 were clarified to indicate that he was talking about a very special case. He supports fixed-rate mortgages unequivocally. In any event, “Adjustable-rate origination peaked two years before the peak in house prices,” he said.

The bad news is that Greenspan believes house prices are “far from the bottom”. The unsold inventory of between 200,000 and 300,000 newly built houses in the United States will be a drag on the market until they are absorbed, and that will take time.

Having disposed of his critics, Greenspan turned to the future outlook, a subject he treats at some length in his book The Age of Turbulence: Adventures in a New World - which, I should add, is highly readable and belies his reputation for elegantly obscure language. The deflationary forces from which he benefited as Fed chairman are abating as wage rates and prices in exporting countries such as China begin to rise. That is already reflected in import prices. So central-bank policy from here on will have to give more weight to the threat of inflation. That is not to say, or even to hint, that his successor Ben Bernanke was wrong to cut interest rates by 75 basis points last week: Greenspan has a firm policy of not commenting on any central-bank decisions.

And what of the outlook for the American economy, I asked, pointing out Greenspan’s public statements that the chance of a recession is more than 50/50.

He holds to that view but quickly added that there is “little hard evidence” that we are headed in that direction. Current data, especially reports that claims for unemployment benefits are falling, or at least not rising, do not suggest that a recession is under way. “I don't recall an instance when a recession has not carried with it a significant rise in unemployment. The January unemployment figures [due out on Friday] will be very clarifying in that regard.”

Meanwhile, Greenspan points out that when recessions do come, they are not the mirror images of a period of growth. “The data show, generation after generation, that the downside of the business cycle is much sharper and much shorter than the upside. Periods of euphoria are quite different from the fear-based part of the cycle. Fear is a far more formidable phenomenon than euphoria.”

At the moment, “Growth in the United States is probably zero. We are at stall speed, and we are vulnerable. American business has not had to borrow and so has not been exposed to the extraordinary pressures in the financial markets.”

To put it differently, and far more colloquially than is Greenspan’s wont – so far, so good, as the man who jumped off the Empire State building said when he reached the fiftieth floor.

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