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Federal Reserve Chairman Alan Greenspan offered a woeful outlook of
situation on Sunday, saying the crisis with the
country’s financial institutions was as dire as he had ever seen in his
long career, and predicting that one or more of those institutions
would likely collapse in the near future.
"Oh, by far," Greenspan said, when asked if the situation was the
worst he had seen in his career. "There’s no question that this is in
the process of outstripping anything I’ve seen and it still is not
resolved and still has a way to go and, indeed, it will continue to be
a corrosive force until the price of homes in the United States
stabilizes. That will induce a series of events around the globe which
will stabilize the system."
Appearing on ABC’s This Week, Greenspan would not definitively say
whether the government should come to the rescue of Lehman Brothers,
which has been forced to consider a possible sale after its stock
shares plunged drastically this past week. Instead he called the
situation surrounding the investment bank — and the bailout that
occurred this past spring of Bear Stearns — as a "once in a half
century, probably once in a century type of event."
The circumstances for Lehman may, as Greenspan noted, be different. Bloomberg News reported on Friday:
"Rising speculation that Lehman Brothers Holdings Inc. may fail is
generating less concern among investors than when Bear Stearns Cos.
imploded in March."
Much of the issue, Greenspan added, was the trouble in the housing
market, which he predicted would become stabilized by next year.
Pressed by host George Stephanopoulos as to whether another major
financial institution — such as the struggling Washington Mutual,
American International Group, or Merrill Lynch — would fail in the
interim, the former Fed chair responded in the affirmative.
"I suspect we will [see one fail]," he said, "but in and of itself
that does not need to be a problem. It depends on how it’s handled and
how the liquidations take place. And, indeed, we shouldn’t try to
protect every single institution. the ordinary cost of financial change
has winners and losers."
In light of these dynamics, Greenspan noted that the government was
left with tough decisions: which institutions are "so fundamental to
the functioning" of society that they demanded a federal safety net?
Earlier in the week, the former fed chairman noted that such choses
extended to tax policy as well. In an interview with Bloomberg
Television, Greenspan argued that the country couldn’t afford the tax
cuts being proposed by John McCain without an equally massive reduction
"I’m not in favor of financing tax cuts with borrowed money," he said. "I always have tied tax cuts to spending."