Greenspan: 1 in 3 odds of a recession by end of year

Well, at least we're hearing some clarity compared to the vague rumors of what Greenspan has been saying in "private." He's now saying that there is a 1 in 3 chance of a recession in the U.S. by the end of the year. According to a Bloomberg report entitled "Greenspan Sees 'One-Third Probability' of Recession This Year",

Former Federal Reserve Chairman Alan Greenspan said there's a "one-third probability" of a U.S. recession this year and that the current expansion won't have the staying power of its decade-long predecessor.

"We are in the sixth year of a recovery; imbalances can emerge as a result," Greenspan, 81, said in an interview yesterday at his office in downtown Washington. "Ten-year recoveries have been part of a much broader global phenomenon. The historically normal business cycle is much shorter" and is likely to be this time, he added.

Personally I see this as a positive challenge offered to Bernanke: If you don't want a recession, simply make sure that you don't do anything stupid on the monetary policy front that might cause one.

So, how likely is a 1 in 3 shot? To some, 1 in 3 sounds like a big deal, but as a general rule, any phenomenon that has 2 in 3 odds (no recession) should be presumed to be the "likely" scenario, and "likely" is really all that matters. Sure, you can hedge a little or buy some insurance, but it would be unwise to make any heavy bets on anything that has only 1 in 3 odds.

In truth, rating the probability of a recession to any precision finer than "likely" versus "not likely" is a fool's errand.

In fact, before you try to put too much faith in Greenspan's 1/3 forecast, note what Bloomberg quotes him as saying:

"We really can't forecast" the economy over the next two years, he said.

-- Jack Krupansky