LONDON (Reuters) – More banks and financial institutionsare likely to face insolvency and need bailouts before theglobal financial crisis is over, according to former FederalReserve chairman Alan Greenspan.
Writing in the Financial Times, Greenspan called thecurrent crisis — which started a year ago — a once or twicein a century event and said insolvency would only end once U.S.house prices stabilized, underpinning mortgage-backedsecurities.
Until then, the threat of collapse among banks and otherglobal financial institutions would persist.
"Fears of insolvency have not, as yet, been fully setaside," Greenspan wrote in an article published online onMonday. "There may be numbers of banks and other financialinstitutions that, at the edge of defaulting, will end up beingbailed out by governments."
The former Fed boss, who stepped down as chairman in 2006after nearly 20 years in the job, said a "sustained level ofglobal equity prices" was critical if banks were torecapitalize themselves and reassure skittish investors.
By extension, continued falls in global equity prices wouldhave a debilitating impact, he said, despite the offset ofrising global savings rates.
"Lower global stock prices could impede therecapitalization of banks and other financial institutions.Debt issuance would also be suppressed as it leverages off thelevel of equity," he wrote.
"The price of equities worldwide will determine whether theinternational financial system can maintain a modicum ofstability as it eases out of its credit crunch, or falls backinto another period of angst and turmoil."
Greenspan said increased market regulation was not theanswer, and could do more harm than good.
"The cause of our economic despair, however, is humannature’s propensity to sway from fear to euphoria and back, acondition that no economic paradigm has proved capable ofsuppressing without severe hardship," he said.
"Regulation, the alleged effective solution to today’scrisis, has never been able to eliminate history’s crises."
Instead of believing that more rigidity in the system wouldprevent breakdown, he said continued flexibility was required.
"We may not easily confront or accept the price dynamics ofhome and equity prices, but we can fend off cries of politicaldespair which counsel the containment of competitive markets.
"It is essential that we do so. The remarkably strongperformance of the world economy since the near-universaladoption of market capitalism is testament to the benefits ofincreasing economic flexibility."
(Reporting by Luke Baker; editing by Andrew Roche)
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