Mr. Greenspan gives a testimony on the global financial system and the role of the IMF in the Asian crisis  (Central Bank Articles and Speeches, 21 May 98)
Central bank: fed | Type: speech | Date: 1998-05-21

Mr. Greenspan gives a testimony on the global financial system and the role o the IMF in the Asian crisis Testimony of the Chairman of the Board of Governors of the U Federal Reserve, Mr. Alan Greenspan, before the Committee on Agriculture of the US Hous Representatives on 21/5/98.The global financial system has been evolving rapidly in recent years. technology has radically reduced the costs of borrowing and lending across traditional borders, facilitating the development of new instruments and drawing in new players.

Infor transmitted instantaneously around the world, and huge shifts in the supply and demand f naturally follow, resulting in a massive increase in capital flows.This burgeoning global system has been demonstrated to be a highly effic structure that has significantly facilitated cross-border trade in goods and services and, has made a substantial contribution to standards of living worldwide.

Its efficiency ex punishes underlying economic imprudence swiftly and decisively.

Regrettably, it also app have facilitated the transmission of financial disturbances far more effectively than everThree years ago, the Mexican crisis was the first episode associated with o high-tech international financial system.

The current Asian crisis is the second.We do not as yet fully understand the new system's dynamics.

We are learning and need to update and modify our institutions and practices to reduce the risks inherent regime.

Meanwhile, we have had to confront the current crisis with the institutions and we have.Many argued that the Asian crisis should be allowed to run its course without from the International Monetary Fund or the bilateral financial backing of other nati asserted that allowing this crisis to play out, while doubtless having additional negati growth in Asia, and engendering greater spill-overs onto the rest of the world, would not a large or lasting impact on the United States and the world economy.They may well have been correct in their judgment, and some would argue t events over the past six months have proved them right; we have so far avoided the continuing downward spiral that some feared.

There was and is, however, a small but not ne probability that the upset in East Asia could have unexpectedly large negative effects on J America, and eastern and central Europe that, in turn, could have repercussions elsewhere, the United States.

Thus, while the probability of such an outcome may be small, its conseq my judgment, should not have been left solely to chance.

We have observed that global f markets, as currently organized, do not always achieve an appropriate equilibrium, or at l time to stabilize.

Moreover, the effects of the Asian crisis on the real economies of the affected countries, as well as on our own economy, are only now just being felt.Opponents of IMF support for member countries facing international financ difficulties also argued that such substantial financial backing, by cushioning the losses investors, encourages excessive risk-taking.

There doubtless is some truth in that, though has been the expectation of governments' support of their financial systems that has been obvious culprit, at least in the Asian case.

In any event, any expectations of broad ba turned out to have been disappointed.

Many if not most investors in Asian economies have suffered substantial losses.Moreover, the policy conditionality, associated principally with IMF lending, dictates economic and financial discipline and structural change, helps to mitigate soinappropriate risk-taking on the part of governmental authorities.

At the root of the p been poor public policy that has resulted in misguided investments and very weak financial Convincing a sovereign nation to alter destructive policies that impair its own perfor threaten contagion to its neighbors is best handled by an international financial institu the IMF.

What we have in place today to respond to crises should be supported even as we improve those mechanisms and institutions.

Some observers have also expressed concern whether we can be confident that IMF programs for countries, in particular the countrie Asia, are likely to alter their economies significantly and permanently.

My sense is consequence of this Asian crisis is an increasing awareness in the region that market cap practiced in the West, especially in the United States, is the superior model; that is greater promise of producing rising standards of living and continuous growth.Although East Asian economies have exhibited considerable adherence to man aspects of free-market capitalism, there has, nonetheless, been a pronounced tendency government-directed investment, using the banking system to finance that investment.

G record of real growth rates of close to 10 percent per annum over an extended period of tim surprising that it has been difficult to convince anyone that the economic system practi Asia could not continue to produce positive results indefinitely.

Following the break increasing awareness, bordering in some cases on shock, that their economic model was inco or worse, has arguably emerged in the region.As a consequence, many of the leaders of these countries and their economic adv are endeavoring to move their economies much more rapidly toward the type of economic sy that we have in the United States.

The IMF, whatever one might say about its policy advi past, has played an important role in this process, providing advice and incentives th sound money and long-term stability.

The IMF's current approach in Asia is fully supporti views of those in the West who understand the importance of greater reliance on market reduced government controls, scaling back of government-directed investment, and embr greater transparency -- the publication of all the data that are relevant to the activiti bank, the government, financial institutions, and private companies.It is a reasonable question to ask how long this conversion to embracing m capitalism in all its details will last in countries once temporary IMF financial support an end.

We are, after all, dealing with sovereign nations with long traditions, not alway with market capitalism.

But my sense is that there is a growing understanding and apprec the benefits of market capitalism as we practice it, and that what is being pres IMF-supported programs fosters their own interests.Similarly, it is a reasonable question to ask whether the US authorities sh seek greater assurance that the ongoing process of reform in the IMF's policies and opera produce additional concrete results before we agree to augment the IMF's resources.

I have believe that the management and staff of the IMF are committed to a process of change.

We somewhat more difficult task in convincing the IMF's membership as a whole of the nee change.

However, I am confident that our leverage in this regard would be reduced if th States failed to agree promptly to the proposed increases in the IMF's resources.Accordingly, I continue fully to back the Administration's request to augmen financial resources of the IMF by approving as quickly as possible US participation in Arrangements to Borrow and an increase in the US quota in the IMF.

Hopefully, neither will to be needed, and no funds will be drawn.

Although the tendency in recent months t stabilization in the East Asian economies is encouraging, clearly those economies are not woods as recent events attest.

Moreover, we have not yet put in place the strengtheniinternational financial architecture that would enable us in the future to place less re IMF to deal with potential systemic crises.

Thus it is better to have the IMF fully equippe response to a pending crisis is essential.