The current market turmoil in the United States is in many ways "identical" to that which occurred in 1987 and 1998, The Wall Street Journal quoted former Federal Reserve Chairman Alan Greenspan as saying on Friday.
Greenspan, Fed chairman from 1987 to 2005 and now a private consultant, told a group of academic economists in Washington, D.C. , Thursday night that business expansions are driven by euphoria and contractions by fear, according to the report.
While economists tend to think the same factors drive expansions and contractions, "the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria."
The euphoria in human nature takes over when the economy is expanding for several years, and leads to bubbles, "and these bubbles cannot be defused until the fever breaks," he said.
Bubbles can't be defused through incremental adjustments in interest rates, Greenspan was quoted as saying. The Fed doubled interest rates in 1994-95 and "stopped the nascent stock-market boom," but when stopped, stocks took off again.
"We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and the same phenomenon occurred, according to his remarks cited by the daily. "The human race has never found a way to confront bubbles."
Source: Xinhua
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