The federal government would give cash payments to defaulting mortgage holders to prevent their homes from being foreclosed, if a former chairman of the Federal Reserve, Alan Greenspan, had his way.

Known during his nearly 20-year tenure at the Federal Reserve for his cryptic assessments of the health of the economy, in retirement he seems to feel free to offer advice to President Bush and to the new Fed chairman, Ben Bernanke.

Mr. Greenspan said the effect on the fiscal health of the American economy of federal government bailouts to mortgage defaulters, though bad, would be less damaging than if attempts were made by the federal government to intervene in the housing market.

Mr. Greenspan also said he thought the economy was on the point of stalling, and that, like a human body whose immune system was low, it had become vulnerable to unexpected shocks.

“I think it is important to recognize that there are a very large number of people who are in very major stress and having great difficulty in paying off their mortgages, even when they have tried exceptionally hard,” he told George Stephanopoulos on ABC’s “This Week.”

“But when you think of how you come to grips with this, it is important to help those people without affecting the mortgage rates and without affecting the structure of markets. Cash is available and we should use that in large amounts as is necessary to solve the problems of the stress.”

When asked whether he meant federal government handouts, he said, “Cash from the government, yes. If you are going to do that, it is far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that it will drag this problem out indefinitely.”

Mr. Greenspan has been accused of contributing to an unsustainable housing price boom and the subsequent wave of mortgage repayment defaults by keeping interest rates too low for too long. He maintained the key federal funds rate at 1% between June 2003 and June 2004, which some say led directly to the housing price bubble.

By suggesting that the federal government provide cash to borrowers who find themselves in difficulties, he finds himself in the unlikely company of a Democratic presidential candidate, John Edwards, an unabashed economic interventionist, who has advocated setting up a government “emergency fund” to help those in need.

While Mr. Greenspan said he did not know for certain whether providing cash to those in mortgage difficulties would work, he thought it worth a try. “I don’t know if it would work, but it would certainly help people, it would help their incomes, it would help their personal state without affecting the structure of the way markets are behaving and the way the adjustment process is going on.

“It is very critical that this thing reach a selling climax, if I may put it in other words exhaust itself. It is only when markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them going down only prolongs the agony.”

Chairman Greenspan said it was important that the housing market be allowed to correct itself by allowing supply to drop to meet demand. “In my judgment the prices will stabilize when the rate of liquidation of this very large overhang of newly built single family homes is at a maximum. Not when we completely get rid of the excess, but when we are well underway. Then the market will begin to stabilize.

“At this stage there is some evidence that sales of new homes are beginning to flatten out, and if we can get a further drop in housing starts, in housing construction, we can begin to really liquidate that excess of inventories. When we have got that well in hand, then I think prices stabilize.”

Although he considered the scale of the sub-prime mortgage losses to be worrying, he thought it should be kept in a wider perspective. “Remember, we have $900 billion worth of securitized sub prime mortgages and almost as much in what we call alternate ‘A’ type of mortgages, which are basically undocumented, various different types of mortgages, and there is going to be significant losses in those numbers. The loss ranges … minimum now is $200 billion but it is easy by some calculations to get to $400 billion,” he said.

“This is a worldwide phenomenon. It is enormous. Except we have to remember that as a result of globalization, and this extraordinary growth over the last couple of decades, aggregate amount of what we call abritrageable long term assets, which is also financial instruments, are close to $100 trillion. And while $400 billion is a very large number, we have to put it in the context of how much damage it can do in this very huge system.”

Mr. Greenspan reiterated that he thought the economy was on the point of stalling and added that stagflation, the return of inflation at a time when interest rates were moving downwards, was now a real danger.

He urged President Bush to allow Mr. Bernanke to do what was necessary to ensure that prices did not rise too sharply.

He said he was “most concerned” about the prospect of stagflation. “One of the lessons of the last 20 years especially is that low inflation is the major contributor to economic growth overall and that fundamentally inflation must be suppressed. It is ultimately the Federal Reserve in this country which is the chief architect of doing that,” he said.

“It is critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately but clearly over the intermediate and long term period, ” he said.