Greenspan 'draws parallel over market turmoil'
Alan Greenspan formerly headed the US Federal Reserve
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Friday, 07, Sep 2007 12:59
The former head of America's central bank has drawn parallels between the current turmoil on the world's financial markets and previous stock market crashes.
During a speech given in Washington, past Federal Reserve chairman Alan Greenspan said the present turbulence reminded him of slumps that occurred in 1987 and 1998.
"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," he said, according to the Wall Street Journal.
Mr Greenspan took over the role of Fed chief shortly before the largest one-day peacetime fall was recorded in the US stock market in October 1987. On the day in question, stocks on the Dow Jones index of leading companies fell by more than 20 per cent.
A second slump hit the markets in 1998, when giant hedge fund Long-Term Capital Management almost collapsed in the wake of a Russian debt crisis.
Addressing an event organised by academic journal the Brookings Papers on Economic Activity, Mr Greenspan said he believed that "fear" was driving the current turmoil on the world's markets.
"The human race has never found a way to confront bubbles," he said, in reference to the way that economic booms can suddenly screech to a halt.
Mr Greenspan's comments come as current Fed chiefs come under increasing pressure to announce a cut in interest rates in order to address the present turmoil, caused by ongoing problems in the US sub-prime mortgage market.
Default levels in the sub-prime market, which provides home loans to those on low incomes or with poor credit ratings, have been increasing in the wake of rising interest rates in the US.
Stocks across the globe have been fluctuating over recent weeks amid trader fears that the world's banks will be increasingly unwilling to make money available to both corporate borrowers and consumers if they make losses as a result of exposure to risky investments within the sector.
Yesterday the Bank of England announced its decision to keep the UK's benchmark rate of interest on hold at 5.75 per cent, warning that it was "too soon" to determine to what extent the current turmoil on the markets would prevent consumers and companies from obtaining credit.
The European Central Bank (ECB) also announced a similar decision yesterday, mirroring moves made by the Australian and Canadian central banks previously.