Greenspan Says Markets to Recover as Investors Return

By Scott Lanman and John Brinsley

Oct. 2 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said financial markets and the economy will recover ``sooner rather than later'' from the worst turmoil in seven decades.

``Trust will eventually reemerge as investors dip hesitantly back into the marketplace,'' Greenspan said today in a speech at Georgetown University's law school in Washington. ``From that point, history tells us, financial and economic revival sets in. I suspect it will be sooner rather than later.''

Greenspan urged lawmakers last week to back ``extensive'' measures to tackle the worst financial crisis since the 1930s and head off a recession. The U.S. Senate passed a $700 billion financial-market rescue package yesterday loaded with inducements for the House of Representatives to approve the measure following its rejection of an earlier version Sept. 29.

``We are living through the type of wrenching financial crisis that comes along only once in a century,'' Greenspan said today. ``Financial markets freeze up as an excess of fear displaces a protracted period of what some might call irrational exuberance. Eventually the market freeze will thaw as frightened investors take tentative steps towards reengagement with risk.''

Greenspan, 82, who served 18 years as Fed chief, took office just before the 1987 stock-market crash. He led the central bank during two eight-month-long recessions, the Asian financial crisis, the 2001 terrorist attacks and the bursting of the Internet bubble.

Deepening Crisis

He spoke amid signs the crisis was deepening. Corporate short-term borrowing plummeted 5.6 percent, the most on record, to the lowest amount outstanding in three years, the Fed said today. Separately, the cost of borrowing in dollars for three months in London rose for a fourth day as banks hoarded cash.

Greenspan, while not commenting today on the rescue bill, spoke from a text about the importance of property rights at a conference entitled, ``Our Courts and Corporate Citizenship.'' He didn't take audience questions.

``Broken market ties among banks, pension and hedge funds and all types of non-financial businesses, will become reestablished, and our complex economy, that has the capacity to produce a fifth of the world's goods and services, will reemerge,'' he said.

The House may vote tomorrow afternoon on the rescue bill.

In a statement e-mailed to lawmakers Sept. 25, signed by Greenspan, former Treasury Secretary George Shultz and Stanford University economist Robert Hall, the three economists wrote that ``the only way that financial institutions can continue to function is for the government to provide financial support.''

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; John Brinsley in Washington at jbrinsley@bloomberg.net.