##tagion effects from asia, the influence of developments in u. s. financial markets, or home - grown causes. whatever the answer, and the answer may be all of the above, this phenomenon illustrates the interdependencies in today ’ s world economy and financial system. perhaps it was inevitable that the impressive and rapid growth experienced by the economies in the asian region would run into a temporary slowdown or pause. but there is no reason that above - average growth in countries that are still in a position to gain from catching up with the prevailing technology cannot persist for a very long time. nevertheless, rapidly developing, free - market economies periodically can be expected to run into difficulties because investment mistakes are inevitable in any dynamic economy. private capital flows may temporarily turn adverse. in these circumstances, companies should be allowed to default, private investors should take their losses, and government policies should be directed toward laying the macroeconomic and structural foundations for renewed expansion ; new growth opportunities must be allowed to emerge. similarly, in providing any international financial assistance, we need to be mindful of the desirability of minimizing the impression that international authorities stand ready to guarantee the liabilities of failed domestic businesses. to do otherwise could lead to distorted investments and could ultimately unbalance the world financial system. the recent experience in asia underscores the importance of financially sound domestic banking and other associated financial institutions. while the current turmoil has significant interaction with the international financial system, the recent crises would arguably have been better contained if long - maturity property loans had not accentuated the usual mismatch between maturities of assets and liabilities of domestic financial systems that were far from robust to begin with. our unlamented savings and loan crises come to mind. these are trying days for economic policymakers in asia. they must fend off domestic pressures that seek disengagement from the world trading and financial system. the authorities in these countries are working hard, in some cases with substantial assistance from the imf, and the world bank, and the asian development bank, to stabilize their financial systems and economies. the financial disturbances that have afflicted a number of currencies in asia do not at this point, as i indicated earlier, threaten prosperity in this country, but we need to work closely with their leaders and the international financial community to assure that their situations stabilize. it is in the - 4interest of the united states and other nations around the world to encourage appropriate policy adjustments,

mr. greenspan's testimony before the joint economic committee of the us congress testimony by the chairman of the board of the us federal reserve system, mr. alan greenspan, before the joint economic committee of the us congress in washington dc on 29 / 10 / 97. we meet against the background of considerable turbulence in world financial markets, and i shall address the bulk of my remarks to those circumstances. we need to assess these developments against the backdrop of a continuing impressive performance of the american economy in recent months. growth appears to have remained robust and inflation low, and even falling, despite an ever tightening labor market. our economy has enjoyed a lengthy period of good economic growth, linked, not coincidentally, to damped inflation. the federal reserve is dedicated to contributing as best it can to prolonging this performance, and we will be watching economic and financial market developments closely and evaluating their implications. even after the sharp rebound around the world in the past twenty - four hours, declines in stock markets in the united states and elsewhere have left investors less wealthy than they were a week ago and businesses facing higher equity cost of capital. yet, provided the decline in financial markets does not cumulate, it is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event in terms of its implications for the macroeconomy. the 1987 crash occurred at a time when the american economy was operating with a significant degree of inflationary excess that the fall in market values arguably neutralized. today ’ s economy, as i have been suggesting of late, has been drawing down unused labor resources at an unsustainable pace, spurred, in part, by a substantial wealth effect on demand. the market ’ s net retrenchment of recent days will tend to damp that impetus, a development that should help to prolong our six - and - a - half - year business expansion. as i have testified previously, much of the stock price gain since early 1995 seems to have reflected upward revisions of long - term earnings expectations, which were implying a continuing indefinite rise in profit margins from already high levels. i suspect we are experiencing some scaling back of the projected gains in foreign affiliate earnings, and investors probably also are revisiting expectations of domestic earnings growth. still, the foundation for good business performance remains solid. indeed, data on our national economy in recent months are beginning to support the notion