Greenspan Urges More Aid to Third-World Banks

By Richard W. Stevenson, The New York Times, 3 December 1997

Federal Reserve Chairman Alan Greenspan called Tuesday night for increased efforts to shore up banks in developing countries, saying that the current crisis in Asia has shown that global markets will ruthlessly batter weak financial systems.

Greenspan said institutions like the International Monetary Fund should do more to identify and head off banking problems in developing nations. And he said that governments in those countries should stop shielding banks from the forces of market competition, and in particular should stop directing banks to lend to politically connected borrowers and industries singled out for special treatment.

In a speech to the Economic Club of New York, Greenspan did not mention the domestic economy or the outlook for interest rates. His prepared remarks, as released by the Federal Reserve in Washington, focused on the lessons that might be gleaned from the financial instability that has spread across Asia and has unsettled markets worldwide.

The accelerated opening up in recent years of product and financial markets worldwide offers enormous benefits to all nations over the long run, Greenspan said, repeating his oft-stated belief that free markets are the only proven path to prosperity.

However, he said, it has also exposed more quickly and harshly the underlying rigidities of economic systems in which governments—or governments working with large industrial groups—exercise substantial influence over resource allocation.

Such systems can produce vigorous growth for a time when the gap between indigenous applied technologies and world standards is large, such as in the Soviet Union in the 1960s and 1970s and Southeast Asia in the 1980s and 1990s. But as the gap narrows, the ability of these systems to handle their increasingly sophisticated economies declines markedly.

The problems sweeping Asia have their roots in troubled banking systems, first in Thailand and later in Indonesia and South Korea. Those three nations have had to call on the IMF to bail out their economies. Japan is also trying to bring long-brewing problems with its banks under control, although there is no indication that Japan738217;s financial woes will require an international bailout.

Leaders in Asia, Greenspan said, are now recognizing the problems they face and the unforgiving nature of the new global market forces.

Those forces, however, will be put to good use if they prompt governments in developing nations to strengthen their banking systems, he said.

Greenspan dismissed as unfeasible the calls from some Asian leaders, most notably Malaysian Prime Minister Mahathir Mohamad of Malaysia, to impose strict controls on activities like currency trading.=

Greenspan gave an upbeat assessment of Japan738217;s efforts to confront the huge pool of bad loans afflicting its financial institutions, saying the Japan government finally seems to be appropriately addressing their problems.

Greenspan acknowledged that the IMF. and other international institutions could have done a better job of spotting the problems developing in Asia738217;s banking systems over the last few years, but added that it was difficult to get governments to take such politically painful steps as shutting down ailing banks.

Yes, the potential risks to the banking systems of many Asian countries and the potential contagion effects for their neighbors and other trading partners should have been spotted earlier and addressed, Greenspan said.

But, he added, there is significant bias in political systems of all varieties to substitute hope (read, wishful thinking) for possibly difficult pre-emptive policy moves.

In trying to fix the problem, the IMF, the World Bank and the governments of the United States and other rich nations should demand that countries in financial trouble take tough steps to buttress their banking systems as well as their economic fundamentals, Greenspan said. His statement was similar to ones from President Clinton and Treasury Secretary Robert Rubin regarding the terms that South Korea should face in return for help from the IMF and the United States.

Assistance without further reform of financial systems and economic policies would be worse than useless since it would foster expectations of being perpetually bailed out, Greenspan said.

Greenspan did not make specific recommendations about how to improve international surveillance of countries likely to face financial problems, or how to press such nations to make needed policy changes before they face a crisis. But he suggested that failure to do so would lead to ever-larger bills for bailouts.

Preventive programs should be accelerated sufficiently far in advance of the next crisis to effectively thwart or contain it, Greenspan said.