Former US Federal Reserve Chairman Alan Greenspan on Sunday said he suspected "we will see other major financial firms fail," but it did not need to be a problem. "It depends on how it is handled and how the liquidations take place," Greenspan said on the ABC program, "This Week."
"And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers." Greenspan also said it was a very bad idea to get rid of short selling even though stock in major financial institutions such as Lehman Brothers and American International Group have been beaten down in recent days.
In July, the US Securities and Exchange Commission issued a temporary emergency rule to curb illegal short selling in 19 major finance stocks including Lehman and mortgage finance giants Fannie Mae and Freddie Mac, which have since been taken over by the government.
The SEC's emergency order ended in mid-August and the agency is not expected to reinstate the rule for those 19 firms or the rest of the market.
When asked whether the government should help Lehman the same way it helped Bear Stearns, Greenspan said the government is trying to do it in a different manner. "When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance," he said.
"Now if you generalise that, it is very clear that that is an unsustainable situation in the financial markets and in the markets."
The Fed and Treasury Secretary Henry Paulson helped orchestrate JP Morgan's take-over of Bear Stearns, complete with a $29 billion promise to absorb losses.
Greenspan also said the chances of escaping a recession was "less than 50 percent." "I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.
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