perverse incentives i spoke of earlier. markets should be allowed to work. recent events in asia have sharpened our understanding of the complexity of today ’ s international capital flows and, presumably, of similar episodes that may emerge in the future. the rapid integration of national financial systems has fostered the growth of trade and standards of living worldwide. it has also forced a review of the soundness and viability of our burgeoning financial systems. we should welcome such pressures even as they impose challenges to all of us. the end result is very worthwhile having.

mr. greenspan's remarks to the economic club of new york remarks by the chairman of the board of the u s federal reserve system, mr. alan greenspan, at the economic club of new york in new york city, on 02 / 12 / 97. dramatic advances in the global financial system have enabled us to materially improve the efficiency of the flows of capital and payments. those advances, however, have also enhanced the ability of the system to rapidly transmit problems in one part of the globe to another. the events of recent weeks have underscored this latter process. the lessons we are learning from these experiences hopefully can be applied to better the workings of the international financial system, a system that has done so much to foster gains in living standards worldwide. the current crisis is likely to accelerate the dismantling in many asian countries of the remnants of a system with large elements of government - directed investment, in which finance played a key role in carrying out the state ’ s objectives. such a system inevitably has led to the investment excesses and errors to which all similar endeavors seem prone. government - directed production, financed with directed bank loans, cannot readily adjust to the continuously changing patterns of market demand for domestically consumed goods or exports. gluts and shortages are inevitable. the accelerated opening up in recent years of product and financial markets worldwide offers enormous benefits to all nations over the long run. however, it has also exposed more quickly and harshly the underlying rigidities of economic systems in which governments - - or governments working with large industrial groups - - exercise substantial influence over resource allocation. such systems can produce vigorous growth for a time when the gap between indigenous applied technologies and world standards is large, such as in the soviet union in the 1960s and 1970s and southeast asia in the 1980s and 1990s. but as the gap narrows, the ability of these systems to handle their increasingly sophisticated economies declines markedly. in western developed economies, in contrast, market forces have been allowed much freer rein to dictate production schedules. rapid responses by businesses to changes in free - market prices have muted much of the tendency for unsold goods to back up, or unmet needs to produce shortages. recent improvements in technology have significantly compressed business response times and enhanced the effectiveness of the market mechanism. most asian policymakers, while justly proud of the enormous success of their economies in recent decades, nonetheless have been moving of late toward these more open and flexible economies. belatedly perhaps, they have