Don't Blame Free Markets for Economic Woes, Alan Greenspan Says

By Howard Mustoe

Aug. 5 (Bloomberg) -- Free markets must not be ``pilloried'' for the recent economic problems faced across the globe, said Alan Greenspan, former chairman of the U.S. Federal Reserve.

Writing in the Financial Times, Greenspan said it is the nature of people to ``sway from fear to euphoria and back,'' and that regulation had never solved a crisis in history.

He described the economic slowdown as ``a once or twice a century event deeply rooted in fears of insolvency of major financial institutions.''

The crunch was not stabilized with a quick cash injection from central banks, but when ``sovereign credits were exchanged for private bank credit,'' according to Greenspan, who cited the examples of Northern Rock Plc and Bear Stearns Cos.

Fears of insolvency have not yet been fully put aside, and there may be more banks and financial institutions that end up being bailed out by governments, he said.

The insolvency crisis will only finally finish when home prices in the U.S. start to stabilize and make clearer the level of equity in homes, according to the former central banker.

The losers in this round of market turmoil have been the most regulated institutions, the banks, when it was assumed the ``weak links'' of private and hedge funds would fail, Greenspan said.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net