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

a major asset. 2. some main orientations and selected first messages of mars let me now illustrate mars ’ three main orientations. the network has three work streams : 1. macro - financial models linking financial stability and the performance of the economy ; 2. early warning systems and systemic risk indicators ; and a brief overview of the network can be http : / / www. ecb. int / home / html / researcher _ mars. en. html. bis central bankers ’ speeches found on the ecb ’ s website here at : 3. assessing contagion risks. as regards the first work stream, mars identifies the lack of widely accepted theoretical and empirical frameworks that thoroughly integrate realistic characterisations of widespread financial instability in aggregate models as one of the main weaknesses of contemporaneous economics laid bare by the crisis. it is true that there were already some effects that had been included in macro models, basically related to the financial accelerator developed by bernanke and gertler. this is, however, only a mechanism that would aggravate a crisis, but was not strong enough to trigger one. recently, adrian, colla and shin examined which frictions should, at a minimum, be included to be relevant. 2 they concluded from the evidence of the crisis that five stylized facts should be reflected in macro - financial models : coexistence of bank and bond finance, substitution from bank to bond financing, increasing credit spreads, stickiness of equity prices and procyclicality of bank leverage. other researchers point to some different factors. we need the academic community and policy authorities engaged in research to improve this situation. only when we have detailed and well - tested models and frameworks with this feature will we be on safe ground to base macro - prudential regulatory policies to contain systemic risk on the scientific foundations that we aspire for. the benefit from a policy perspective is that with such an approach, one can compare the benefits and the costs of new or scrapped and tightened or loosened regulation. the network has developed several theoretical and empirical tools that integrate widespread financial instability into models of the aggregate economy. these develop the transmission channels between financial instability and the overall economy in detail, and assess the performance of alternative policies to address systemic risk. the network is also engaged in a joint cross - country project involving ten euro area central banks to develop a quantitative model for assessing alternative macro - prudential regulatory policies. a second main orientation of mars has been to develop early