Fed Chief Warns Against Currency Controls : Greenspan Cautions Asia
International Herald Tribune
October 15, 1997
Brian Knowlton

Alan Greenspan, the Federal Reserve Board chairman, warned governments Tuesday against imposing controls on currency trading as he joined the debate on how to avoid the sort of crises that have jolted Asian markets.

Any attempt to restrict financial flows, he said, would probably have "adverse unintended consequences."

Mr. Greenspan also called on his fellow central bankers around the world to help prolong this decade's uncommon run of price stability, describing the low-inflation environment as the "most important development" of recent years and declaring it essential to longer-term growth.

Traders appeared heartened that Mr. Greenspan had decided to enter the fray on the Asian financial turmoil. Stock markets and currencies in Thailand, Malaysia, the Philippines and Indonesia have suffered heavily since the Thai baht was allowed to fall in early July.

Although the Fed chairman made no direct reference to the issue, his comments were viewed as a response to Prime Minister Mahathir bin Mohamad of Malaysia, who last month angrily lashed out at currency trading as "unproductive and immoral" and said it should be made illegal.

Malaysian officials later retreated from his comments, saying the matter was under review.

Mr. Greenspan, in remarks prepared for a conference on global investment, said that today's stunningly rapid flow of direct investments was bolstering growth and improving living standards in developing countries such as those in Southeast Asia.

But it was also, he added, creating risks and vulnerabilities of a magnitude once unknown.

"Increasing global financial efficiency, by creating the mechanisms for mistakes to ricochet throughout the global financial system, has patently increased the potential for systemic risk," he said.

"The new world of financial trading can punish policy misalignments, actual or perceived, with amazing alacrity," far more rapidly than was the case even 15 years ago, Mr. Greenspan said. As shown by the recent developments in Asia and in the 1994-1995 Mexico peso crisis, he said, serious macroeconomic policy mistakes "reverberate around the world at a prodigious pace."

But to resort to capital controls to deal with this problem, he said, "would be a step backward."

Even largely speculative investments in other countries or currencies, he said, are fundamentally "part of the support systems for efficient international movement of goods and services."

[In Hong Kong, leaders of the Philippines and Singapore reaffirmed their commitment to open markets Tuesday, The Associated Press reported.

[President Fidel Ramos of the Philippines and Prime Minister Goh Chok Tong of Singapore, speaking at a conference, both implicitly rejected calls by Mr. Mahathir for controls on international currency trading.

["The remedy lies not in turning away from the world but in embracing it closely," Mr. Ramos said.]

Rather than government controls, Mr. Greenspan said, the key to avoiding future currency crises was for governments to provide more accurate, comprehensive and timely financial and economic data to prevent the sort of stampede that can result when investors are caught off guard by bad news.

He described the new speed and fluidity of financial markets as a source not just of risk but of opportunity, making it easier for money to flow from countries with excess savings to those with scarce capital and helping investors disperse their risk and hedge their opportunities.

"This," he said, "suggests the potential for a far larger world financial system than currently exists." Trends also point to a much greater international division of labor in the 21st century, benefiting both investors and consumers, he said.

But for that, Mr. Greenspan added, "a stable macroeconomic environment" will have to be maintained. 

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