Greenspan Urges Repair Of Global Infrastructure

Federal Reserve Board Chairman Alan Greenspan said Thursday that world leaders should act quickly to adopt a new global financial infrastructure.

Consensus already has been reached on global standards for bank regulation, better disclosure of central bank interventions in the economy, detailed data on global lending, and the need for sound accounting policies, Mr. Greenspan told the annual convention of the Securities Industry Association.

These initiatives, "if effectively implemented, should significantly tighten international financial discipline," Mr. Greenspan said in a speech beamed by satellite to Boca Raton, Fla., where 770 high-level securities executives were meeting.

Mr. Greenspan's comments show that, despite a rebound in the U.S. stock and bond markets, the Fed remains deeply concerned by the global financial crisis-particularly the prospect that unsound banking practices in a developing country could disrupt the U.S. economy.

"There is no shortcut to sound fundamentals," he said. "If we are going to have a sophisticated, high-tech international financial system, the lessons of recent years make it clear that all participants must follow the policies that make it possible."

World leaders still must adopt global bankruptcy rules, devise new arrangements for debtors and creditors to share risk, and find ways to limit explicit and implicit government guarantees of private debt, the Fed chairman added.

Action is required because the current financial infrastructure has become obsolete, Mr. Greenspan said, noting that cross-border bank lending has doubled in the past decade and daily foreign exchange transactions now top $1.5 trillion.

"Market discipline is far more draconian and less forgiving than 20 or 30 years ago," he said. "Owing to greater information and more opportunities, capital now shifts more readily and increasingly to those ventures or economies that appear to excel."

The current global financial crisis offers a unique opportunity for reform because investors in the next several years will be overly cautious in extending credit to developing countries, much like U.S. lenders were reluctant to make loans immediately after the 1980s banking crisis, he said.

"Assuming we successfully resolve the current crisis, we will have time to restructure," Mr. Greenspan said. "I fear only that ... we will fall back into inaction, raising the stakes of the next crisis."

Mr. Greenspan gave a strong endorsement for market-based supervision, saying financial markets are becoming too complex for regulators to oversee.

"Twenty-first century regulation is going to increasingly have to rely on private counterparty surveillance to achieve safety and soundness," he said. "There is no credible way to envision most government financial regulation being other than oversight of process."

Industry observers said reforms to the global financial system are sorely needed. "It is past time for a new financial infrastructure," said Karen Shaw-Petrou, president of the industry consulting firm ISD-Shaw Inc. Poor banking practices in developing countries are now capable of undermining the economy of the United States, she said.

Richard Whiting, general counsel at the Bankers Roundtable, applauded the call for more market-based oversight. "Market regulation is more efficient, more omnipresent, and results in less burden on both banks and the government," Mr. Whiting said.

Mr. Greenspan devoted the bulk of his speech to an analysis of the current global crisis. Reiterating comments made Oct. 26 by William H. Poole, president of the Federal Reserve Bank of St. Louis, Mr. Greenspan said the liquidity crisis in the bond market appears to be easing. "We already are seeing signs of some reversals," he said.

This liquidity crisis, he said, was caused when investors, shocked by the Russian debt moratorium, fled to the highly liquid U.S. Treasury market. They were afraid to put money into other investments until they could figure out what was happening to the market, he said.

Heavy debt burdens by Asian companies were "particularly instrumental" in inducing the global economic crises, he said. Reducing leverage must be a goal of any global financial reform effort, he said.

Governments should not react to financial crisis by imposing controls on the flow of capital, he said. "Restricting controls to short-term capital inflows, as is often recommended, is not a solution," he said. "They will invariably also restrict direct investment that require short-term capital."

Pegging exchange rates to the dollar also will not help developing countries, he said. "Even dollarization, or its equivalent in other key currencies, is not a source of stability if the underlying policies are unsound," he said.

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