By Eric Burroughs
TOKYO, Nov 6 (Reuters) - Former Federal Reserve Chairman Alan Greenspan and billionaire investor George Soros warned of more pain ahead for the U.S. economy, saying the downturn in the housing market had yet to take its full toll on growth.
Greenspan told a forum in Tokyo on Tuesday that high inventories of unsold homes presented a major risk to the U.S. economy and financial markets and that he was not sanguine about how quickly the glut could be reduced.
"We still need to accelerate the rate of inventory liquidation, and that will mean bringing housing starts down and sales up. We have a long way to go," said Greenspan, who was answering questions at a CEO conference in Tokyo via video link from Washington.
The surge in defaults in subprime mortgages has taken a toll on major financial institutions, leading to billions of dollars in asset write-downs and the departures of the chief executives of Merrill Lynch <MER.N> and Citigroup <C.N>.
Citigroup's additional $11 billion write-down tied to subprime mortgage revived fears about the extent of the credit crunch, hurting equity markets and the dollar while keeping benchmark U.S. Treasury yields near a two-year low.
Soros said in a lecture at New York University that the U.S. economy was on the verge of a serious correction and that the Federal Reserve may be underestimating the potential slowdown.
"I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing," Soros said.
The comments came after Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, said on CNBC Television the Fed cannot afford to let U.S. housing prices fall sharply and would need to cut rates aggressively, perhaps to 3.5 percent.
The Fed has slashed rates by a combined 75 basis points to 4.5 percent in an effort to limit the damage on the broader economy from the housing market slide and ease some of the financial strains from the resulting credit crunch.
But Fed Governor Frederic Mishkin said on Monday that the Fed should be prepared to reverse its monetary easing if the U.S. economy escapes major damage from the market turmoil, even as a recovery is a way off in housing and subprime mortgages.
Greenspan said about $900 billion of subprime mortgages have been securitised into fixed-income instruments, and the excess level of unsold homes is driving the price declines that are eroding the value of the securities backed by those mortgages.
"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," Greenspan said.
PIMCO's Gross likened the U.S. housing market downturn to the bursting of Japan's property bubble in the 1990s that dragged the world's second-largest economy into a protracted bout of deflation.
Gross said the pain to household finances from adjustable-rate mortgages being reset higher had yet to be fully felt.
"We've only begun to see the pain from the standpoint of the homeowner in terms of those monthly payments. Defaults and delinquencies will increase as we extend throughout 2007 and then into 2008," Gross said.
Greenspan, who retired in early 2006 after nearly two decades as Fed chief, has previously said the odds of the U.S. economy falling into recession were less than 50-50 despite ongoing troubles in the property market.
Inventories of existing U.S. homes have jumped to the highest on record going back to 1999, while inventories of new homes remain at elevated levels as falling prices and tighter credit standards have deterred buyers.
But Greenspan said the global economy was very powerful even with the "extraordinary" rise in oil prices, and the underlying structure of the global economy was doing well.
(Additional reporting by Hideyuki Sano in Tokyo; Jennifer Ablan, John Parry and Walter Brandimarte in New York)