U.S. Federal Reserve Chairman Alan Greenspan offered a bleak assessment Friday of the financial turmoil gripping Asia and urged the international community to prepare for the next major financial crisis.
"In an environment of weak financial systems, lax supervisory regimes and vague guarantees about depositor or creditor protections, bank runs have occurred in several countries and reached crisis proportions in Indonesia," Greenspan told a Federal Reserve Bank of Atlanta conference in Miami Beach."Uncertainty and retrenchment have escalated. The state of confidence so necessary to the functioning of any economy has been torn asunder," he said. "Some exchange rates have fallen to levels that are understandable only in the context of a veritable collapse of confidence in the functioning of an economy."
Greenspan said that collapsing currencies in Asia were rooted in a "visceral, engulfing fear," rather than a rational reaction to sharp declines in the state of economies.
The Fed chief said the global financial system needed reform after the problems in Asia and the Mexico peso crisis of 1995, and he warned that another major crisis could strike after the turmoil in Asia subsided.
"We are beginning slowly but surely to begin to understand how this new high-tech international financial system is functioning," Greenspan said.
"And hopefully before we run into crisis No. 3 - and there will be a crisis No. 3 - we'll have sufficient preventive measures in place to either fend it off, or if it occurs, to assuage its severity," Greenspan told the conference.
While stressing the seriousness of the problems facing Asia, Greenspan held out hope of recovery if its hardest-hit nations reformed their ways and the international community continued to offer support.
"Eventually, the Asian economies now suffering from the current crisis will recover," Greenspan said.