Washington, 30 October 1997 (RFE/RL)--The man who controls America's monetary policy, Alan Greenspan, sees benefits for the future in the wild swings on Wall Street and other major financial markets around the world.
Greenspan, Chairman of the U.S. Federal Reserve Board, said Wednesday that in years to come, people may look back on this week's disastrous financial declines as "a salutary event."
Explaining his optimism, he emphasized several points about the basic robustness of the U.S. economy and domestic safeguards that can be taken to minimize the infectious spread of economic weakness from one country to another.
On the U.S. economy, Greenspan had welcome words of confidence for nervous American investors. He said economic growth remains strong, business performance is solid and inflation low, even falling. and that America's prosperity is not threatened by the currency problems in Asia that destabilized world markets.
Even before he completed his testimony, a stock market rally under way on Wall Street began to accelerate but later fizzled to only modest gains for the day.
Greenspan predicted that subdued and slowing economic growth in the U.S. will be a major consequence of the problems in Asia. But that in his view is one of the best things to emerge from the market turmoil.
Greenspan has long warned that the current pace of growth in the U.S. cannot be sustained without risking inflation, forcing him to tighten the money supply and raise interest rates.
Experts were quick to note that unlike his previous testimony this year, Greenspan Wednesday said nothing about interest rates. He reported positive signs of increasing productivity in the U.S. and said the retrenchment in recent days will help prolong a period of business expansion that has already lasted more than six years in the United States.
He was also pleased at the drop in prices of overvalued stocks, He said even if the slowdown in Asia had not led to the frenzied selling on Wall Street, some other event eventually would have driven down a market that had gone too high and was at risk of developing a speculative bubble that could damage the economy.
Greenspan said important lessons for the future can be gained from the experience of recent days.
He said it is now clear that capital was flowing too quickly into the emerging Asian economies, "More investment monies flowed into these economies than could be profitably employed at modest risk," Greenspan said.
He said an aggravating factor were weak domestic banking systems, or "financial systems were in many instances less than robust, beset with problems of lax lending standards, and weak supervisory regimes."
Greenspan said the experience in Asia underscores the importance of developing a sound domestic banking system that can absorb and withstand the inevitable problems of rapidly developing free market economies.
He said investment mistakes are bound to occur and such economies will periodically run into difficulties.
When it happens, Greenspan said governments must not try to come to the rescue of failing enterprises. He said government must allow companies to default and private investors to take their losses.
He said in adverse conditions, a government's priority must be to create new business opportunities.
"Government policies should be directed toward laying the macroeconomic foundation for renewed expansion and new growth opportunities must be allowed to emerge," Greenspan said.
He said that because of the globalization of national economies, "contagion" is a worrying feature of the international system, It is thus in the interest of the U.S. and other countries to give assistance to Asian leaders and help stabilize the economic situation as quickly as possible.
Greenspan said the U.S. and other nations around the world should "encourage appropriate policy adjustments and where required provide temporary financial assistance."
But he said the U.S. and other lenders should be careful to "minimize the impression that international authorities stand ready to guarantee the liabilities of failed domestic businesses."
He said "that could lead to distorted investments and could ultimately unbalance the world financial system."