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World: Economy Requires Order And Discipline Everywhere

Washington, 2 October 1998 (RFE/RL) -- U.S. Treasury Secretary Robert Rubin says the global economy cannot live with the "vast and systemic disruptions" experienced in the past year, a series of challenges from Asia to Russia that he calls the most serious in 50 years.

Rubin told a financial conference in New York Thursday that is why finance ministers and central bank governors from 22 nations will meet with him and U.S. Federal Reserve (Central Bank) Chairman Alan Greenspan Monday evening in Washington to review ideas for reforming the international financial system.

Rubin said any reforms must work from acceptance that a market-based global economic system, based on the relatively free flow of goods, services and capital between nations around the world will best promote global economic well being in the decades ahead.

But he said that while free markets bring enormous benefits, there are problems that markets themselves cannot solve.

That point has been underscored by the sharp fall in stock prices on global markets in the past two days, driven primarily by concerns among investors and traders that serious financial losses are yet to be revealed from the use of sophisticated financial instruments. These include derivatives -- whose value is derived from groups of stocks, bonds or currencies -- and trading techniques like hedging -- literally placing bets on minor differences in financial statistics.

The danger in hedge funds came suddenly to the fore when it was revealed this week that one of the largest hedge funds, Long-Term Capital Management, had to be bailed out with $3.5 billion from a group of large financial institutions.

The rescue was arranged by the U.S. Federal Reserve and Chairman Alan Greenspan defended the central bank's involvement before a congressional committee Thursday. But congressmen said that even though government money was not involved, it was clear that the unregulated and secretive hedge funds are a real danger to the financial system.

Rubin acknowledged that the actions of hedge and other speculative types of investment funds -- he called it the "ill-discipline of creditors and investors in the industrial nations" -- was a major factor in the current crises in Asia and Russia.

But he said the crises are also caused by the money from these banks and funds moving quickly into countries whose financial systems are underdeveloped, often badly flawed and poorly regulated.

"This combination of flawed economies, changes in the international markets and the unchanging human psyche underlying markets helped produce the crisis of the last year," he said.

Rubin said the ideas for reforming the global system coming from Monday's meeting will include increasing openness in the system itself, strengthening national financial systems, promotion in the industrial nations of more soundly based policies for dealing with large private capital flows and developing new ways to respond to crises, including greater participation by the private sector.

Rubin said there is no intention to reinvent two center pieces of the global system, the International Monetary Fund (IMF) and the World Bank. On the whole, he said, the IMF has made sensible policy judgments in the face of complex and in many ways unprecedented challenges. Nevertheless, the fund needs greater transparency and a fresh look at its approaches to global crises.

IMF Managing Director Michel Camdessus agrees, saying that the fund itself constantly reviews what it is doing, seeking new approaches and remaining open to new ideas for solving problems. He told a press conference in Washington Thursday that the fund is always learning. "I would have preferred to learn before" the contagion from the Asian crisis swept the world, he said, but it was unprecedented and the fund has already learned a great deal.

As importantly, said Camdessus, individual nations must do the same things being demanded of the global system -- adopt greater transparency and strengthen banking and financial systems.

If we want a better world order, mused Camdessus, everyone must do what many have preached for a century -- establish order, discipline, and civilization in the workings of markets.