of the u. s. slowdown on japan and in emerging asia and has added to their homegrown troubles. the high - tech retrenchment, on the other hand, has been less important for the euro area and in latin america. the next linkage is through exchange rate movements. to a first approximation, exchange rate developments do not affect the magnitude of the slowdown, but they do affect the distribution of the slowdown around the world. normally, we would expect the exchange rate in the country slowing down to depreciate, more so if the country was aggressively cutting policy interest rates. and, we would expect even more depreciation, if concerns about returns on capital were sharply depressing equity prices. the income - induced decline in interest rates, and hence depreciation in exchange rates, ordinarily plays the role of a built - in stabilizer in the country slowing down, but it also spreads the slowdown around the world. one of the surprising features of recent experience has been the continued appreciation of the dollar. the appreciation of the dollar relative to the yen is perhaps not so surprising, given the troubles in japan, but the continued strength of the dollar in terms of the euro is a puzzle. the prevailing view until late 2000 was that the u. s. dollar was strong against a broad group of currencies – and especially against the euro and several other european currencies – because, to a large degree, internationally mobile capital sought higher rates of return in the united states. following this logic, a slowing of the u. s. economy, a decline in expected profits, and a correction of asset prices should have weakened the dollar. i hesitate to offer a resolution to the puzzle of the depreciation that did not happen, given that i was among those who expected a depreciation of the dollar under these circumstances. nevertheless, economists are much better at inventing explanations of past developments than predicting the future, so here goes. the current slowdown in the united states is expected to be only temporary and capital flows may be influenced more by differentials in long - term growth prospects than by shorter - run cyclical fluctuations. the prospect of a return to robust growth in the united states that is above the longer - run expected rate of growth in europe may therefore continue to favor dollar - denominated assets. indeed, this may be reinforced by the fact that dollar - denominated assets have become so much cheaper. proponents of

mr. greenspan testifies on private - sector refinancing of the large hedge fund, long - term capital management testimony by the chairman of the board of governors of the us federal reserve system, mr. alan greenspan, before the committee on banking and financial services of the us house of representatives on 1 / 10 / 98. mr. chairman and other members of the committee, i thank you for this opportunity to report on the federal reserve ’ s role in facilitating the private - sector refinancing of the large hedge fund, long - term capital management ( ltcm ). in my remarks this morning, i will attempt to put into some perspective the events of the past few weeks and discuss some questions of importance to public policy makers that they raise. the federal reserve bank of new york ’ s efforts were designed solely to enhance the probability of an orderly private - sector adjustment, not to dictate the path that adjustment would take. as president mcdonough just related, no federal reserve funds were put at risk, no promises were made by the federal reserve, and no individual firms were pressured to participate. officials of the federal reserve bank of new york facilitated discussions in which the private parties arrived at an agreement that both served their mutual self - interest and avoided possible serious market dislocations. financial market participants were already unsettled by recent global events. had the failure of ltcm triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own. with credit spreads already elevated and the market prices of risky assets under considerable downward pressure, federal reserve officials moved more quickly to provide their good offices to help resolve the affairs of ltcm than would have been the case in more normal times. in effect, the threshold of action was lowered by the knowledge that markets had recently become fragile. moreover, our sense was that the consequences of a fire sale triggered by cross - default clauses, should ltcm fail on some of its obligations, risked a severe drying up of market liquidity. the plight of ltcm might scarcely have caused a ripple in financial markets or among federal regulators 18 months ago - - but in current circumstances it was judged to warrant attention. what is remarkable is not this episode, but the relative absence of such examples over the past five years. dynamic markets periodically engender large defaults. events of the past few