Saturday 20 December 2008

Markets May Rally in 6-12 Months: Greenspan

Financial markets, which have been depressed by ‘fear’ not seen since at least the 1930s, are likely to rebound in the next six to 12 months, former Federal Reserve chairman Alan Greenspan said in a commentary published by The Economist online.

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Guanyu said...

Markets May Rally in 6-12 Months: Greenspan

20 December 2008

Financial markets, which have been depressed by ‘fear’ not seen since at least the 1930s, are likely to rebound in the next six to 12 months, former Federal Reserve chairman Alan Greenspan said in a commentary published by The Economist online.

‘Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind),’ Mr. Greenspan wrote. ‘Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.’

Stabilisation in home prices, which will allow financial institutions to judge the value of collateral underlying mortgages and mortgage-backed securities, is likely in 2009 and is another ‘critical piece’ to ending the turmoil, the former Fed chairman said.

The Treasury’s US$250 billion in investments in the equity of American banks has halved the gap between the London Interbank Offered Rate and the overnight index swap rate, an indication of progress, Mr. Greenspan said.

‘While helpful, the Treasury’s US$250 billion goes only partway towards the levels required to support renewed lending,’ he said. ‘Temporary public capital injections into banks should help lead to stability and arguably provide far more benefit per dollar than conventional fiscal stimulus.’

Banks must raise additional capital before investors will lend to financial institutions, Mr. Greenspan said. Financial institutions have reported credit losses and writedowns on mortgage-related assets totalling US$1 trillion since the beginning of 2007.

‘When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily,’ Mr. Greenspan said. ‘It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system.’ -- Bloomberg