risk bearing in our economies. products for the most part have arisen within the banking system, where they evolved from being specialized instruments for one borrower to having more standardized characteristics. at the point that standardization became sufficient, the product migrated to open capital markets, where trading expanded to a wider class of borrowers, tapping the savings of larger groups. money market mutual funds, futures contracts, junk bonds, and asset - backed securities are all examples of this process at work. ross levine and sara zervos, “ stock markets, banks, and economic growth, ” american economic review, vol. 88 ( june 1998 ), pp. 537 - 558. once capital markets and traded instruments came into existence, they offered banks new options for hedging their idiosyncratic risks and shifted their business from holding to originating loans. bank trading, in turn, helped these markets to grow. the technology - driven innovations of recent years have facilitated the expansion of this process to a global scale. positions taken by international investors within one country are now being hedged in the capital markets of another : so - called proxy hedging. but developments of the past two years have provided abundant evidence that where a domestic financial system is not sufficiently robust, the consequences for a real economy of participating in this new, complex global system can be most unwelcome. improving deficiencies in domestic banking systems in emerging markets will help to limit the toll of the next financial disturbance on their real economies. but if, as i presume, diversity within the financial sector provides insurance against a financial problem turning into economy - wide distress, then steps to foster the development of capital markets in those economies should also have an especial urgency. and the difficult ground work for building the necessary financial infrastructure – improved accounting standards, bankruptcy procedures, legal frameworks and disclosure – will pay dividends of their own. the rapidly developing international financial system has clearly intensified competitive forces that have enhanced standards of living throughout most of the world. it is important that we develop domestic financial structures that facilitate and protect our international financial and trading systems that, aside from their periodic setbacks, have brought so much good.

mr greenspan draws lessons from the global crises of 1997 and 1998 remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the world bank group and the international monetary fund, program of seminars, washington, d. c., on 27 september 1999. * * * with the benefit of hindsight, we have been endeavoring for nearly two years to distill the critical lessons from the global crises of 1997 and 1998. from what seemed at the time to be isolated and contained disruptions in thailand and indonesia, economic turmoil deepened and spread, ultimately engulfing the emerging - market economies of east asia and other parts of the globe and then the financial markets of industrial countries. the failure of normal adjustment processes to contain the financial turmoil made this crisis longer and deeper than any of us had expected in its early days. one possible clue to this breach may reside not in the events leading up to the east asian crisis in the spring of 1997, but rather in the extraordinary episode of financial market seizure that afflicted some emerging - market and industrial - country markets, particularly in the united states, a year ago. following the russian default of august 1998, public capital markets in the united states virtually seized up. for a time not even investment - grade bond issuers could find reasonable takers. while federal reserve easing shortly thereafter doubtless was a factor, it is not credible that this move was the whole explanation of the dramatic restoration of most, though not all, markets in a matter of weeks. the seizure appeared too deep seated to be readily unwound solely by a cumulative 75 basis point ease in overnight rates. arguably, at least as relevant was the existence of backup financial institutions, especially commercial banks, that replaced the intermediation function of the public capital markets. as public debt issuance fell, commercial bank lending accelerated, effectively filling in some of the funding gap. even though bankers also moved significantly to risk aversion, previously committed lines of credit, in conjunction with federal reserve ease, were an adequate backstop to business financing. with the process of credit creation able to continue, the impact on the real economy of the capital market turmoil was blunted. firms were able to sustain production, business and consumer confidence were not threatened, and a vicious circle – an initial disruption in financial markets leading to losses and bankruptcies among their borrowers and thus further erosion in the financial sector – never got established. what we perceived in the united