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Greenspan says more banks, institutions may founder

(Agencies)
Updated: 2008-08-05 07:59

London  - More banks and financial institutions are likely to face insolvency and need bailouts before the global financial crisis is over, according to former US Federal Reserve chairman Alan Greenspan.

Former US Federal Reserve chairman Alan Greenspan speaks at the Per Jacobsson Foundation Lecture on the 'Balance of Payments Imbalances' at the International Financial Corporation in Washington October 21, 2007. [Agencies]

Writing in the Financial Times, Greenspan called the current crisis -- which started a year ago -- a once or twice in a century event and said insolvency would only end once US house prices stabilized, underpinning mortgage-backed securities.

Until then, the threat of collapse among banks and other global financial institutions would persist.

"Fears of insolvency have not, as yet, been fully set aside," Greenspan wrote in an article published online on Monday. "There may be numbers of banks and other financial institutions that, at the edge of defaulting, will end up being bailed out by governments."

The former Fed boss, who stepped down as chairman in 2006 after nearly 20 years in the job, said a "sustained level of global equity prices" was critical if banks were to recapitalize themselves and reassure skittish investors.

By extension, continued falls in global equity prices would have a debilitating impact, he said, despite the offset of rising global savings rates.

"Lower global stock prices could impede the recapitalization of banks and other financial institutions. Debt issuance would also be suppressed as it leverages off the level of equity," he wrote.

"The price of equities worldwide will determine whether the international financial system can maintain a modicum of stability as it eases out of its credit crunch, or falls back into another period of angst and turmoil."

Greenspan said increased market regulation was not the answer, and could do more harm than good.

"The cause of our economic despair, however, is human nature's propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship," he said.

"Regulation, the alleged effective solution to today's crisis, has never been able to eliminate history's crises."

Instead of believing that more rigidity in the system would prevent breakdown, he said continued flexibility was required.

"We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets.

"It is essential that we do so. The remarkably strong performance of the world economy since the near-universal adoption of market capitalism is testament to the benefits of increasing economic flexibility."