Stepping into a debate over the best way to handle future currency crises, Federal Reserve Chairman Alan Greenspan warned Tuesday that it would be a mistake to impose controls on the billions of dollars of investments made daily by traders around the world.
Greenspan's comments, prepared for a seminar on global investments, represented his most extensive review of the financial turmoil that has engulfed several Asian countries this year.Greenspan conceded that the speed at which investors can send money in and out of a country has been accelerated by computers and global communications networks, but he said it would be impossible to revert to a simpler time.
"We cannot turn back the clock on technology and we should not try to do so," he said in remarks to a daylong seminar at the Cato Institute, a Washington think-tank.
Greenspan said the increased flow of investment from one country to another has worked to the benefit of developing nations, providing them with needed money to build roads, ports and other infrastructure and raise the standard of living for their citizens.
But Greenspan said the 1994-95 peso crisis in Mexico and more recently the severe currency turmoil that has struck several Southeast Asian nations, including Thailand, Malaysia and Indonesia, underscored the financial problems that can quickly strike when sentiment suddenly changes and investors stampede to remove their money from a particular country.
Malaysian Prime Minister Mahathir Mohammad last month threatened to clamp controls on foreign currency trading and blamed his country's troubles on currency speculators such as George Soros.
While he did not mention Mahathir by name, Greenspan said any efforts to impose restrictions or controls on financial flows would likely have "adverse, unintended consequences."
He said the biggest danger would be that investors would be less likely to put up the money developing nations need to produce jobs.
Rather, Greenspan urged that technology be used to contain the new stresses on financial market by enhancing the ability of a country's banks to detect bad loans and improve the quality of statistics government agencies release.
Greenspan said that in the case of both Mexico and Thailand, not enough accurate economic information was released in a timely manner to head off a financial crisis.
"Such disclosure would help to avoid sudden and sharp reversals in the investment positions of investors once they become aware of the true status of a country's and a banking system's financial health," he said.