Wednesday, April 12, 2006

Greenspan tells it like it is

Now that he's no longer Fed Chairman he can tell it like it is. Asian currencies to appreciate vs the dollar (evoking the Plaza Accord), a global asset bubble driven by liquidity, and Sarbanes-Oxley an undue burden on corporations.

Financial Times: Greenspan calls for stronger Asian currencies

Alan Greenspan, former chairman of the US Federal Reserve, on Wednesday said that current imbalances in the global economy could be corrected if high-growth countries allowed their currencies to strengthen.

Mr Greenspan’s remarks were in response to a suggestion on whether Asian countries should consider their own Plaza Accord-style agreement, similar to the one the US reached with Europe and Japan to coordinate intervention in the foreign exchange market to weaken the dollar and reduce the US trade deficit.

“The equilibrium is better reached by allowing a number of these countries that show a much higher growth rate than developed countries to allow their currencies to firm,” Mr Greenspan said. He was speaking to the FT Asian Financial Centres Summit in Seoul via satellite.

“I realise what that does to competitiveness, but that’s the way markets work efficiently. Endeavouring to prevent the exchange rates from moving creates all sorts of distortions.”

Mr Greenspan also warned of a potential fall in global asset prices, stressing that the ample liquidity currently in the financial system appeared to be an “abnormal situation” and could not last forever.

He said the source of this liquidity was the market value of assets worldwide, which had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates and a significant fall in real equity premiums.

“A good part of this expansion is a direct function of the decline in real equity premiums. That cannot go on indefinitely,” he said.

“I don’t know when the liquidity is going to decline but I am reasonably certain that what we’re looking at is an abnormal situation.”

The former Fed chairman also said he was disturbed over the effects the US Sarbanes-Oxley act – the more stringent corporate governance rules introduced in 2002 - was having in driving away listings of foreign companies.

“The base of Sarbanes-Oxley is a definite advance in corporate governance in the US. There are sections of the bill which were put together rather quickly, in particular Section 404, and which creates a heavy burden on the accounting system and is an anathema to foreign investors who endeavour to list IPOs in the US and have chosen not to.”

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