Greenspan Declines World Firefighter Role
Wednesday February 24 5:36 PM ET
By Caren Bohan
WASHINGTON (Reuters) - Federal Reserve
Chairman Alan
Greenspan said Wednesday the U.S. central bank was limited in its
ability to rescue crisis-ridden emerging countries, whose fates
depended mostly on their own policies.
As global financial leaders consider ways to prevent economic
contagion from flaring up again, Greenspan rejected out of hand
solutions that would assign the U.S. central bank the role of
global firefighter.
''Our central focus on policy is the United States. Whether we
lower or raise interest rates, the central focus is our long-term
goal, which is maximum, sustainable economic growth,'' he told
the House Banking Committee in day two of his semiannual report
to Congress on the economy.
Tuesday, Greenspan said that with the U.S. economy growing
robustly, the Fed may consider taking back part of last year's
rate cuts. But he also said it was possible the global crisis
could reignite, which could send the Fed back into a rate-cutting
mode.
Answering lawmakers' questions Wednesday, Greenspan focused
heavily on international issues.
The U.S. Treasury market was disappointed he did nothing to
dispel the negative psychology spurred by his mention the day
before of possibly taking back the rate cuts.
The benchmark 30-year U.S. Treasury bond finished down 1-4/32
point, sending the yield to a six-month high of 5.51 percent.
Stocks followed bonds lower. The Dow Jones industrial average
ended down 144.75 points at 9,399.67.
While emphasizing the global crisis was far from over, Greenspan
said the financial system probably was no longer the powder keg
it was six months ago. That was in part because the hot money
that flowed freely into emerging economies throughout the 1990s
was no longer there.
''The crisis has created a great deal of caution and that has
meant that a lot of the leverage has worked its way down again
and we don't have the extreme, unstable system,'' he said.
The Fed's three 1998 rate cuts were aimed at greasing the wheels
of a world financial system on the verge of freezing up after
Russia's economy collapsed last August.
Greenspan was queried about a proposal floated by Argentina to
replace its own currency with the dollar as a means of preventing
the capital flight plaguing its neighbors.
''We have no interest in -- nor does Treasury have interest in --
this issue of being a lender of last resort outside the United
States,'' he said, adding the Fed would oppose any proposal to
have its discount window serve banks of foreign countries that
might choose to use the dollar as their currency.
Still, Greenspan had no problem with a country wanting to base
its economy on the dollar on a unilateral basis.
He was noncommittal about what types of currency systems made the
most sense for emerging countries, calling floating regimes the
''least worst'' of the many available choices. Greenspan gave a
half-hearted endorsement to currency boards, rigid systems that
peg a local currency to the dollar and require an arsenal of
reserves to support them.
A crawling peg, which allows for gradual currency depreciation,
was used by Brazil but ultimately contributed to the country's
economic unraveling as it was unable to support its real
currency. Greenspan said such systems were ''not useful.''
In the end, though, he said sound policies were far more
important than a particular choice of exchange system.
''The best way to maintain, in general, stable exchange rates, is
to maintain a stable international economy and very basically a
low-inflation economy,'' Greenspan said.
The message was in sync with one conveyed by U.S. Treasury
Secretary Robert Rubin at last weekend's gathering of officials
from the Group of Seven rich nations. ''Currency stability is a
very useful objective and the way to achieve it is through sound
policy and strong domestic demand-led growth,'' said Rubin who
over the weekend told European officials to forget fancy ideas
for controlling global financial markets.
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