N.Y. Fed's Corrigan Sounds an Alert
NEW YORK - E. Gerald Corrigan, president of the Federal Reserve Bank of New York, said Monday that relying entirely on market forces risks to the world financial system.
"There is a tendency to think ... they must be good, and net-net, they are good," Mr. Corrigan said at a conference on restructuring financial services in Japan and the U.S. The conference was sponsored by the Japan Society.
"It does seem to me these very same forces call into play the question of how do we strike the right balance" between the benefits of marketplace efficiencies and the need for safe and stable financial systems.
Factoring in Technology
Technological advances have reduced transaction costs and increased efficiency, but they also "make it easier for institutions to avoid the spirit of regulation," the Fed president said.
Mr. Corrigan said financial regulators around the world should operate on the assumption that the systemic risks are greater because of technology-driven market forces.
He said the challenge for regulators will be how to balance free market forces with the dictates of safety and stability in the financial structure.
Views of Japanese Banker
In another speech at the Japan Society conference, a Japanese banker said it is imperative that the industry not repeat the previous lending mistakes it made in capital-poor developing countries.
"We must make sure money we lend is used to build factories and infrastructure and produce jobs," said Hideo Ishihara, deputy president of the Industrial Bank of Japan. Speaking of Latin America, he said bankers must ask themselves: "Have we really helped these countries?"
Mr. Ishihara said loans for economic purposes to the Soviet Union and Eastern Europe should not be made until legal, accounting, management, and technological frameworks are in place.
The Japanese banker said the capital shortage for developing countries will be a result of higher demand and lower supply. He said that Japanese investors are turning more to domestic needs and that Germany's resources are strained by the reunification process.
The rapid credit expansion of the 1980s, Mr. Ishihara said, was a result of lax monetary policies and will not be repeated in the 1990s. He said the best scenario for the United States would be for a moderate recovery from recession led by external demand. Recovery through stimulation of domestic demand would place too many strains on the world economy, he added.