Alan Greenspan, Perennial Optimist

Alan Greenspan has a solution to the economic crisis: a rising stock market!

What, then, will be the source of the new private capital that allows sovereign lending to be withdrawn? Eventually, the most credible source is a partial restoration of the $30 trillion of global stockmarket value wiped out this year, which would enable banks to raise the needed equity. Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind). Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.

Well, there you have it. Give things six months to a year, there will be a healthy market rebound, especially in financial stocks which will suddenly find themselves able to raise affordable equity capital again, and all will be right as rain.

The problem, of course, is that "hopefully" is not a plan, especially when it's attached to the idea that stocks will go up when they're still overvalued relative to pretty much any other part of corporate America's capital structure.

Greenspan has convinced himself that America's banks are solvent, and that therefore a relatively modest cash injection should solve all the economy's financial problems. But hang on:

The insertion, last month, of $250 billion of equity into American banks through TARP (a two-percentage-point addition to capital-asset ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming modest further write-offs, simple linear extrapolation would suggest that another $250 billion would bring the spread back to near its pre-crisis norm.

Yes, once again he's "assuming modest further write-offs" -- that is, assuming his conclusion.

It's very easy for Greenspan to say that if there isn't much in the way of future write-offs, and if stocks start going up rather than down, then our problems will largely be solved. It's easy, but it's not particularly helpful. Is this really how he conducted monetary policy when he was at the Fed? If so, he was a much worse Fed chairman than anybody suspected at the time.