Academic journal article Federal Reserve Bulletin

Statements to the Congress

Academic journal article Federal Reserve Bulletin

Statements to the Congress

Article excerpt

Statements to the Congress Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, in Chicago, Illinois, before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, May 14, 1990.

I am pleased to appear before the submcommittee this morning. The issues you are raising are both wide-ranging and of immense importance to the evolution of the financial system. I could not possibly do justice to all of them this morning. What I will attempt to do, and what I hope will be useful to you, is first to describe the global environment in which U.S. financial firms are likely to be operating over the foreseeable future. Against this background, I will comment on the effectiveness of U.S. banks' competition today and will then discuss some policy implications. I will also comment briefly on competition in securities and financial futures markets and on proposals to change regulatory jurisdiction in these markets.

GLOBALIZATION OF FINANCIAL MARKETS

Globalization and interdependence are becoming the dominant elements of word finance. Foreign-based financial intermediaries play an increasingly prominent role in U.S. financial markets, and foreign investors are adding to their already significant holdings of U.S. financial and other assets. The volume of transactions by foreigners in U.S. securities markets has increased even more dramatically than foreign holdings. For example, foreign purchases and sales of U.S. Treasury securities surpassed $4 trillion on a gross basis in 1989, up from $100 billion to $200 billion early in the decade. Similary, foreign purchases and sales of U.S. corporate stocks and bonds have been running dramatically above rates eearly in the decade. U.S. purchases and sales of foreign stocks and bonds also increased sharply during the 1980s, as did the activities abroad of U.S. financial intermediaries. This surge in cross-border financial transactions has paralleled a large advance in the magnitude of cross-border trade of goods and services.

A key factor behind these trends in international trade and securities transactions is a process that I have described elsewhere as the "downsizing of economic output." By this I mean that the creation of economic value has shifted increasingly toward conceptual values with decidedly less reliance on physical volumes. Today, for example, major new insights have led to thin fiber optics replacing vast tonnages of copper in communications. Financial transactions historically buttressed with reams of paper are bieng progressively reduced to electronic charges. Such advances not only reduce the amount of human physical effort required in making and completing financial transactions across national borders, but facilitate more accuracy, speed, and ease in execution.

Underlying this process have been quantum advanced in technology, spurred by economic forces. In recent years, the explosive growth in information-gathering and processing techniques has greatly extended our analytic capabilities of substituting ideas for physical volume. The purpose of production of economic value has not changed and will not change. It will continue as before to serve human needs and values. But the form of output increasingly will be less tangible and hence more easily traded across international borders. It should not come as a surprise, therefore, that in recent decades the growth in world trade has far outstripped the growth in domestic demand for goods and services. This development, or necessity, implies that on average the share of imports as a percentage of gross domestic product has grown dramatically worlwide. Since irreversible conceptual gains are propelling the downsizing process, these trends almost surely will continue into the twenty-first century and beyond.

New technology--especially computer and telecommunications tecnology--is boosting gross financial transactions across national borders at an even faster pace than the net transactions supporting the increase in trade in goods and services. …

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