Banks in the United States need higher capital than they currently have, Alan Greenspan, former chairman of the Federal Reserve told a Mumbai conference via satellite on Monday.

I think even in non-euphoria, non-crisis times, we need to have a larger buffer than we currently have, he said.

Greenspan, who stepped down as Fed chairman in 2006 after 18 years at the helm, said the considerable slack in the world economy suggested the global rate of inflation excluding food and fuel will go down until the early part of next year.

But the massive amounts of liquidity infused into the banking systems by the central banks around the world would fuel inflationary pressures, he said.

Unless the central banks defused the large increase in their assets, inflation will begin to pick up, he added.

It is critical, but it has got to be done and it is not going to be easy to do, Greenspan said.

On economic bubbles he said, the critical problem was not about identifying them, but what could be done to deflate these bubbles without hurting the underlying growth.

Critics however, argue that under his leadership, the Fed kept short-term borrowing costs too low for too long after the 2001 recession, sowing the seeds of the housing and easy credit bubble that contributed to the financial crisis.

(Reporting by Saikat Chatterjee; editing by Stephen Nisbet)

Inflation