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Greenspan: Banks need capital for recovery

March 5, 2009 by  

Alan Greenspan thinks the economy could turn around next yearAlan Greenspan may be currently taking some heat as the man whose policies enabled financial institutions to lend irresponsibly, but he has faith in the U.S. market to recover within the next year – as long as banks receive the capital they need.

In an editorial on the Economist website, the former Federal Reserve chairman blamed the market depression on "fear not experienced since the early 20th century."

To help rebuild the market, Greenspan suggested that "temporary public capital injections" into financial institutions are needed and would be far more effective than "conventional fiscal stimulus."

As investors see more capital on banks’ books, their fear will subside and they will feel confident enough to begin lending to them again, he suggests.

Greenspan also predicted that over the next year, home prices will stabilize, helping banks to accurately judge the relative value of their toxic assets, which will in turn aid economic recovery.

"Human nature being what it is, we can count on a market reversal hopefully within six months to a year," he concludes.

Other economists have not been so hopeful in their forecasts for the U.S. economy, suggesting it could be years before it picks up again.
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