Thursday November 5, 10:28 pm Eastern Time
Greenspan sees hints financial crisis dissipating
WASHINGTON, Nov 5 (Reuters) - Federal Reserve Chairman Alan Greenspan said on Thursday he saw some signs the fright produced by the world financial crisis may be dissipating, saying money markets were becoming more normal.
He said the global uncertainty had led to a ''startling'' flight to U.S. Treasury securities that produced a sharp divergence between their yields and that of securities seen as less liquid.
''It is, of course, plausible that the current episode of investor fright will dissipate, and yield spreads and liquidity premiums will soon fall into more normal ranges. Indeed we are already seeing significant signs of some reversals,'' he said.
Speaking by videoconference to a Florida meeting of the Securities Industry Association, Greenspan made no direct reference to the outlook for the world or U.S. economies, and gave few pointers on interest rates.
It was his first speech since a surprise reduction in interest rates on Oct. 15, and markets were watching closely for any indication of further cuts when Fed rate setters meet on Nov. 17.
On Wall Street on Thursday, share prices continued a rally, with the Dow Jones Industrial Average jumping 132 points to 8,915 on top of Wednesday's 77-point increase.
In his speech, Greenspan also said the financial crisis gripping Asia was caused in part by highly leveraged lending, which must be curbed in future.
The single most effective way to slash leverage in emerging market economies was to eliminate all debt guarantees by both central banks and governments, so that borrowers had to bear the burden of bad decisions, he said.
Greenspan said he accepted that, until the current financial crisis was resolved, there must be ''transition support'' in the form of loans by international institutions but he warned that it should not be casually given.
''Any temporary financial assistance must be carefully tailored to be conditional and not encourage undue moral hazard,'' he said, referring to the condition in which lenders and borrowers undertake excessive risks in the belief that there always will be a government bailout if needed.
One of the consequences of the crises afflicting many parts of the world likely will be increased caution, Greenspan said, adding ''If anything, lenders are likely to be overcautious.''
But that should not blind authorities to the need to introduce reforms to buttress the global financial system so that it is sounder when it next was battered by crisis, he warned.
''I fear only that when available delay becomes evident, we will fall back into inaction, raising the stakes of the next crisis,'' Greenspan said
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