MercoPress. South Atlantic News Agency

Greenspan on bubbles: “fear is far more potent than euphoria”

Current financial turmoil is identical to that seen in earlier stock market crashes, particularly in 1987 and the fallout from the near demise of Long Term Capital Management in 1998, warned former Federal Reserve chairman Alan Greenspan.

Anxiety over a global credit squeeze triggered by the US housing slump and credit re pricing was driven by "fear", said Greenspan in a speech in Washington organized by the academic journal Brookings Papers on Economic Activity. He added that "the human race has never found a way to confront bubbles". According to the Wall Street Journal, Mr Greenspan, who headed the Fed between 1987 and 2005, drew parallels with US financial panics down the years, driven either by a collapse in confidence in banks or land speculation turning sour. The current turbulence is being driven by banks' unwillingness to lend until the full extent of their exposure to the troubled sub-prime mortgage market becomes clear, a situation which threatens to hurt the US economy and spread to other countries. The Federal Reserve has said sub-prime losses could total 100 billion US dollars and is under pressure to cut interest rates later this month to make borrowing cheaper for banks and consumers. "The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998 and what we saw in the stock market crash of 1987," Mr Greenspan said. 1987 saw the largest one-day peacetime fall in the US stock market, when more than 20% was wiped off the value of the Dow Jones index of leading companies. The collapse was triggered by the widespread fear that the US economy was set to slow after a period of feverish expansion, in which borrowed money, some of it high-risk, was used to fund huge takeovers. The financial problems of Long-Term Capital Management, which caused consternation in the global derivatives market, were triggered by the Asian financial crisis of 1997, which spread to Russia and Brazil a year later. Stock markets in the US recovered relatively quickly after both upheavals. Mr Greenspan, who now advises a number of hedge funds and other financial institutions, said the nervousness which typically gripped markets when a period of "euphoric" expansion ended was extremely powerful. "The expansion phase of the economy is quite different and fear as a driver, which is going on today, is far more potent than euphoria," he said. Responding to Mr Greenspan's remarks, US Treasury Secretary Henry Paulson acknowledged there were "certain similarities" to past financial crises, adding that "it would take a while for confidence to return" to financial markets. "What we are dealing with are excesses which have come from a prolonged period of benign markets and lending practices which weren't always disciplined," he told Bloomberg Television. "There will be some organizations which won't make it, but I feel very strongly that we have a resilient economy" said Paulson adding that this happens when the world economy is very strong which also means an avid market for US exports.