He admits: "We in the United States built up modest reserve balances of DM and yen only when we perceived that the foreign exchange value of the dollar was no longer something to which we could be indifferent, as when, in the late 1970s, our international trade went into chronic deficit, inflation accelerated, and international confidence in the dollar ebbed." In other words, the US uses reserves in foreign currency not to buttress or stabilize the value of its own as reflected by market fundamentals, but as a tool to manage international trade to its advantage.
After listing some technical reforms that he admits may not be sufficient or even relevant, Greenspan summarizes: "The adoption of any rule is not a substitute for appropriate macroeconomic, exchange rate, and financial sector policies. Indeed, the endeavor to substitute such a regime for the more difficult fundamentals of sound policy will surely fail." It is a "do as I say, but not as I do" statement.
Greenspan concludes: "Over the medium term, it would be desirable for emerging market economies to develop a more sophisticated approach to the problem of managing their liquidity. There is an obvious connection between "value-at-risk" techniques used by large financial institutions to manage their exposure to risk and the liquidity-at-risk approach proposed here. It would be productive were those large financial institutions to play a role in helping countries develop their own capabilities to implement this approach, perhaps with technical assistance from G-7 supervisory authorities and international financial institutions."
There are two problems with this conclusion. 1) It is the very attempt by emerging market economies to develop a more sophisticated approach to the problem of managing their liquidity and risk that gave birth to the rapid growth of the global foreign exchange markets and the field of sophisticated structured finance of derivatives in the last decade that had brought on the global financial crises. Greenspan seems to be advocating an increase rate of mutation of the virus to boost the resistance of the patients. 2) Greenspan's advice for emerging economies to adopt the "value-at-risk" techniques used by large financial institutions to manage their exposure to risk will only reduce sovereign governments to the status of commercial enterprises. Unlike multinationals, governments cannot use mass lay-off and market retrenchment as management tools for maximize profit and pass the burden to society at large. This is a point that the US dominated IMF has yet to fully grasped.
Henry C.K. Liu
"William F. Hummel" wrote:
> On April 29, Alan Greenspan gave a very interesting speech at the
> World Bank Conference in Washington DC yesterday. I would be
> interested to hear PK views on it. The speech can be found
> http://www.federalreserve.gov/boarddocs/speeches/1999/19990429.htm
>
> William F Hummel