of relative openness. money tends to move around these controls with progressive ease, and it becomes more difficult over time to counteract this force with acceptable costs to other objectives. for this basic reason, many emerging market governments that were early proponents of selective controls have moved to eliminate them. faced with the challenges of managing policy in an increasingly integrated world economy, the dominant instinct of officials is often to try to shield the economy from volatility. but the crises of the 1990s helped demonstrate why this approach can be both futile and counterproductive. as economies become more open to capital flows, policies designed to insulate an economy from external shocks, whether they be fixed exchange rate regimes or selective capital controls and restrictions on international transactions, rarely offer durable stability, and they bring additional risks. these risks come in the form of additional distortions that might undermine future growth or magnify vulnerability to future financial volatility. the more promising approach is to invest in the complement of institutions and policies that enable an economy to live more comfortably with openness. focusing on those measures that will enable an economy to be more flexible and to adapt more quickly to change ultimately will be a more effective policy strategy. it is politically more difficult, but economically more effective than those solutions that seem to offer protection from competition and volatility. crisis resolution a fourth lesson, or series of lessons, comes from our experience in crisis resolution. the strategies adopted to stabilize markets and then to foster recovery varied significantly across the crisis economies. each involved a somewhat different mix of policy reforms and temporary financial assistance, tailored to the different conditions that prevailed. where there was success, the common feature was what larry summers called the powell doctrine applied to international finance – the overwhelming use of force, with a clear strategy for resolution. the “ force ” in this sense applied both to the scale of financing made available relative to the need and to the quality of the policy measures. very substantial resources were deployed in support of the recovery efforts, and a large share of the resources was made available upfront, in order to try to mitigate the liquidity problem and to stem the loss of confidence. in contrast to the typical imf program, governments were permitted to use a portion of the imf - supplied resources to take some pressure off the exchange rate, as foreign investors sought to reduce their exposures to the crisis countries in the initial stages of the crises. but the provision of large external financial resources was not, by itself, sufficient to achieve

timothy f geithner : reflections on the asian financial crises remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, at the trends in asian financial sectors conference, federal reserve bank of san francisco, san francisco, 20 june 2007. * * * it is a pleasure to be here at the san francisco fed and to join you in looking back at the asian financial crises. many people in this room played critical roles in the drama of that time. we did not always completely agree, but we usually found a way to work together on a common strategy. the crises hit with remarkable speed and force, with substantial effects on the world economy as a whole. the collapse in confidence led to substantial and sustained outflows of capital, forcing large exchange rate devaluations, a sharp fall in asset prices and leaving entire banking systems virtually insolvent. gdp fell by between 10 and 15 percent. the crises forced substantial changes in the imf ’ s instruments for crisis resolution and a major international effort to strengthen financial systems. even after a decade, the crises are a subject of debate and controversy. for many, they represented a failure of financial globalization, a dramatic demonstration of the perils of openness to capital flows. a popular perception was that economies with strong records of growth and financial management were forced into positions of vulnerability by externally imposed programs of capital - account liberalization and then were pushed into turmoil by an unstable, even predatory international financial system. adherents of this view tended to view the policy response to the crisis as harsh or inept or both. time has taken some of the edge off these criticisms, but they still affect the political debate in the region today. they reflect anxieties about the balance of risks and benefits of economic and financial integration that still play an important role in shaping economic policy, even with the substantial progress achieved since the crises. i want to outline some of the principal lessons of that period, both in terms of reducing vulnerability to financial crisis and in terms of strategies for crisis resolution. i offer these with the knowledge that it is hard for anyone who was not a finance minister or a central bank governor in the region at the time to understand what it was like. as one of those involved in shaping the international response, i can say that there was a lot we did not fully appreciate about the dynamics of the crises then, and that justifies humility today in thinking about the lessons for the future. with