Greenspan: Equities Signaling the Way to Recovery

Former Federal Reserve Chairman Alan Greenspan wrote Sunday that once stocks start to recover, the turnround may well have large (and positive) economic consequences. While highlighting the difficulties policymaker face in fighting the steepest recession in a generation, the former Fed Chief says all will be well.

Global economic policymakers are currently confronted with their most daunting challenge since the 1930s….Counterfactual scenarios are highly problematic to say the least. But there are intriguing possibilities that offer comfort that, if all else fails, the global economy is not on a track towards years of stagnation or worse.

In one credible scenario … lie the seeds of recovery. Stock markets across the globe have to be close to a turning point. Even if a stock market recovery is quite modest, as I suspect it will be, the turnround may well have large (and positive) economic consequences.

A recovery of the equity market, driven largely by a receding of fear, may well be a seminal turning point of the crisis…The key issue is when. Certainly by any historical measure, world stock prices are cheap, even after the recent run-up. But as history also counsels, they may or may not get a lot cheaper before they decisively return to more normal levels.

As the level of fear recedes, stock market values will rise. Even if we recover only half of the $35,000bn global equity losses, the quantity of newly created equity value and the additional debt it can support are important sources of funding for banks. As almost everyone is beginning to recognise, restoring a viable degree of financial intermediation is the key to recovery. Failure to do so will significantly reduce any positive impact from a fiscal stimulus. [via FT]

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