Financial Crisis Not Over Yet, Says Greenspan

Source : The Business Times, May 22, 2009

Banks need more money, mortgage crisis still serious

(NEW YORK) Former Fed chairman Alan Greenspan signalled that the financial crisis has yet to end even as borrowing costs tumble, warning that US banks must raise 'large' amounts of money.

'There is still a very large unfunded capital requirement in the commercial banking system in the United States and that's got to be funded,' Mr Greenspan said in an interview yesterday in Washington. He also said that 'until the price of homes flattens out, we still have a very serious potential mortgage crisis'.

Mr Greenspan's comments suggest that he sees a bigger capital shortfall in the banking system than reflected in regulators' stress tests on the 19 biggest US lenders. Treasury Secretary Timothy Geithner told lawmakers on Wednesday that banks have issued more than US$56 billion in new stock or debt since the tests found 10 firms needed to raise about US$75 billion.

A lack of capital at banks may inhibit lending to consumers and businesses, tempering any economic recovery. The former Fed chief said that the continued slump in home prices is putting at risk millions of borrowers.

Home prices will only start to stabilise once the 'liquidation' rate of single-family homes has peaked, he said. 'I don't think we're there yet.'

More broadly, 'things have unquestionably improved' across the economy and financial markets, he said.

The London interbank offered rate, or Libor, for three-month US dollar loans fell three basis points on Wednesday to 0.75 per cent, the British Bankers' Association said, the 35th straight drop. The Libor-OIS spread, a gauge of banks' reluctance to lend, narrowed to 55 basis points, the least since February 2008. It was as high as 364 basis points in October.

That's an 'extraordinary improvement', said Mr Greenspan, who last year said that the credit crisis would be at an end once the Libor-OIS spread narrowed past 25 basis points. 'Virtually all of the various credit spreads, not only in the US but globally, have come down.'

Alan Blinder, a former Fed vice-chairman, also said that 'if there are no more reversals, history will judge that by May 2009, we will have passed the worst of the crisis.'

'My current guess would be in terms of GDP the second quarter will be a bottom and by the third quarter we're eking out a positive,' he said.

Mr Greenspan agreed, estimating that US gross domestic product will decline at an annual rate of one per cent in the second quarter.

Members of the Fed's Open Market Committee who met in Washington April 28-29 saw 'some signs pointing towards economic stabilisation', and some officials detected prospects for 'a trough' in the housing market's downturn, according to minutes of the meeting released on Wednesday in Washington.

Fed governors and district-bank presidents project that the economy will shrink 1.3-2 per cent this year and grow 2-3 per cent in 2010, according to median estimates released on Wednesday. -- Bloomberg