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Last Updated: Friday, 7 September 2007, 14:13 GMT 15:13 UK
Greenspan points to market 'fear'
Alan Greenspan
Alan Greenspan has been more outspoken since leaving the Fed
Current financial turmoil is identical to that seen in earlier stock market crashes, Alan Greenspan has warned.

The ex-Federal Reserve boss compared today's situation to the crash of 1987 and the fallout from the near-demise of Long-Term Capital Management in 1998.

Anxiety over a global credit squeeze triggered by the US housing slump was driven by "fear", he said in a speech.

"The human race has never found a way to confront bubbles," he said, alluding to booms suddenly grinding to a halt.

'Identical behaviour'

According to the Wall Street Journal, Mr Greenspan - who headed the Fed between 1987 and 2005 - drew parallels in a speech in Washington 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.

Fear as a driver, which is going on today, is far more potent than euphoria
Alan Greenspan

The Federal Reserve has said sub-prime losses could total $100bn and is under pressure to cut interest rates later this month to make borrowing cheaper for banks and consumers.

"The behaviour 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.

The remarks were made at a meeting in Washington organised by the academic journal Brookings Papers on Economic Activity.

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.

Henry Paulson, US Treasury Secretary
There will be some organisations which won't make it
Henry Paulson, Treasury Secretary

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.

Cargo being loaded onto ship at Miami port
Many experts believe the financial turmoil will slow the US economy

"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 organisations which won't make it, but I feel very strongly that we have a resilient economy."

Separately, the International Monetary Fund (IMF) said it would lower its growth forecast for the US economy for the rest of the year due to the financial turmoil.

"This is a serious crisis that will certainly have effects for 2007 and 2008," IMF managing director Rodrigo Rato said.

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