"The human race has never found a way to confront bubbles," former Federal Reserve chairman Alan Greenspan said in reference to the euphoria that can precede contractions, or reactions, like the current market turmoil, the Wall Street Journal reported on its Web site.
Speaking to economists on Thursday in Washington, Greenspan compared the turmoil to that of 1987 and in 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed, the WSJ said.
"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock market crash of 1987, I suspect what we saw in the land boom collapse of 1837 and certainly the bank panic of 1907," Greenspan said at the event organized by the Brookings Papers on Economic Activity, the WSJ said.
Greenspan, now a private consultant, said euphoria takes over when the economy is expanding and leads to bubbles, "and these bubbles cannot be defused until the fever breaks," the report said.
Bubbles cannot be defused through incremental adjustments in interest rates, he suggested, the paper reported.
The Fed doubled interest rates in 1994 to 1995, and "stopped the nascent stock-market boom," but when stopped, stocks took off again, he said.
"We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred," Greenspan said.
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