Greenspan spots ‘seeds of recovery’ in markets

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The former chairman of the US Federal Reserve said rising share prices should restore confidence in the markets and stimulate growth.

"Behind the unprecedented loss of wealth during the last year and a half lie the seeds of recovery," he wrote in the Financial Times.

"Stock markets across the globe have to be close to a turning point. Even if the stock market recovery is quite modest, as I suspect it will be, the turnaround may well have large (and positive) economic consequences."

Greenspan said that losses suffered by stock market investors around the world more than doubled to $35,000 billion (£24,700 billion) in the 10 weeks following the collapse of Lehman Brothers last autumn leading to a collapse in credit availability.

"At some point, global stock prices will bottom out and rise. A rise in global private sector equity will tend to raise the net worth (at market prices) of virtually all business entities," he said.

"In the current environment, new equity will open up frozen markets and provide capital across the globe to companies in general and banks in particular.

"Greater equity, after addressing the shortage of bank net worth, will support more bank lending than currently available, enhance the market value of collateral (debt as well as equity), and could reopen moribund debt markets.

"In short, liquidity should re-emerge and solvency fears recede. Restoration of normal global lending could be as effective a stimulus as any fiscal programme of which I am aware."