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Saturday August 30 7:41 AM EDT
Greenspan on Role of Governments in Markets
By Jose Paulo Vicente
JACKSON, Wyo. (Reuter) - Governments must create and enforce regulatory standards and, if
necessary, intervene in financial markets to prevent major disruptions, the Federal
Reserve Chairman Alan Greenspan said.
In a speech in which the Fed chairman avoided making any mention of the state of the
economy, Greenspan said on Friday that authorities must struggle continuously to find the
proper blend of policies to keep financial markets running smoothly.
"Governments, including central banks, have been given certain responsibilities ... that
must be balanced," Greenspan told economists and government officials gathered here for a
conference.
"We have the responsibility to prevent major financial market disruptions through
development and enforcement of prudent regulatory standards and, if necessary in rare
circumstances, through direct intervention in market events," he added.
The Fed chairman's remarks were delivered in a speech before the 21st annual economic
symposium on public policy. The conference, which is being sponsored by the Federal
Reserve Bank of Kansas City, brings together the cream of the world's financial
community.
Held at a resort town nestled in the Rocky Mountains, the three-day event focuses on how
governments can maintain financial stability in a more open, globalized economy.
Greenspan said the abandonment of the gold standard used before the early 1930s
effectively augmented the power of central banks to issue currency.
That paved the way for smaller fluctutions in growth and minimized the magnitude of
recessions in major industrial countries in the post World War II era.
However, "peace-time inflation has been far more virulent" in those countries, he said.
Greenspan added that the role of central banks is primarily to be lenders of last resort.
"Central banks are led to provide what essentially amounts to catastrophic financial
insurance coverage," he said, adding, however, that "such a public subsidy should be
reserved for only the rarest of disasters."
Citing the recent currency upheaval in Thailand and the 1994 financial crisis in Mexico,
Greenspan also said the release of timely and accurate data is key to the maintenance of
financial stability.
"I don't know what the appropriate amount of disclosure is, but it's pretty clear, in
both the Mexican and Thai experiences .... what level we now have is too low," Alan
Greenspan told an audience of economists and government officals in Jackson Hole, Wyo.
The Fed chairman's comments contributed to a broad sell-off in the Mexican stock market.
After Greenspan's speech, a Fed spokesman said that disclosure of economic data had been
inadequate at the time of the peso crisis, but that the situation had since improved.
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