March 3, 2008 Remarks by Treasury Assistant Secretary for International Affairs Clay Global Financial Stability and Systemic Risk: The Current Financial Market Turmoil Washington – Thank you for your kind introduction. I'm pleased that you have invited me to speak at today's forum. In 2006 I spoke at an IIB Dialogue in Singapore on "Promoting a More Open Global Financial System," and I'm glad to be back today – particularly given how calm everything is in the markets. Today I will briefly review the U.S. and global economic situation and some of the factors contributing to today's financial turmoil. I will then describe some of the lessons we have learned so far and the steps the U.S. and the international financial community is taking to address the issues we face. Economic overview The U.S. economy is fundamentally sound, diverse and resilient. Economic growth over the past four years has averaged 2.9 percent. More than 8 million jobs have been created since August 2003. However, following several years of what, in retrospect, was unsustainable home price appreciation, the U.S. economy is undergoing a significant and necessary housing correction, which is weighing on near-term economic growth. Headwinds also are coming from higher energy prices and stress in the financial markets. Looking beyond the U.S., global economic growth remains solid, in the vicinity of 4 percent, which is still well above the 3 ¼ percent average of the 1980s and 1990s, though not as robust as the 5 percent numbers of recent years. Much of the global slowdown is concentrated in G-7 economies, though emerging markets are likely to experience some dampening of their growth prospects as well. However, many parts of the emerging market world are still expected to grow in excess of 5 percent in 2008, with some, especially developing Asia, likely to grow in excess of 8 percent. Underlying Weaknesses that Contributed to the Current Financial Market Turmoil In the context of these global economic conditions, let me turn to the current financial market turmoil. I know that this has been a roller-coaster ride for you and the financial institutions you represent. Likewise, here at Treasury, we have been very much engaged in monitoring and analyzing the turmoil, both domestically and internationally. Let me spend some time this morning giving you our perspectives on the underlying weaknesses that contributed to the turmoil and what the U.S. Administration is doing to address the problems. I will then turn to the international response that we have been working in cooperation with many other countries to craft. Of course, we are still in the midst of the turmoil, so it is premature to draw final lessons and make final recommendations. There are a variety of ways to categorize the weaknesses, but let me try to take a lesson from a key observer of the international financial system – David Letterman – and give you my top ten list. Unlike Mr. Letterman, this will not be in any particular order.
United States policy response With this long list of ten weaknesses I have just identified, it does suggest we might want to do something about it. So what should we do? In the United States, I would say that we are doing three things that also helps feed into a fourth. First, we have made adjustments to the macroeconomic policy mix to support the broad U.S. economy while the inevitable corrections take place in the housing and credit markets. The President and Congress responded with a bipartisan fiscal stimulus package totaling more than $150 billion, while the Federal Reserve has made adjustments in liquidity support and monetary policy. Second, the Administration has supported a number of initiatives – both private sector led and public sector initiatives – in response to the housing correction, designed to prevent as many foreclosures as possible. Third, the President's Working Group on Financial Markets – the PWG – an interagency policy coordination group chaired by Secretary Paulson and consisting of the Fed, the SEC, and the CFTC, is actively engaged in a comprehensive review of policy issues related to recent financial market turmoil. This review includes approaches to strengthen risk management practices at financial institutions, improve market discipline in the securitization process, and improve the issuance and use of credit ratings. International plan This is a summary of the actions that the U.S. Administration has supported so far. But the current financial market turmoil is not just a U.S. problem. Indeed, the financial market turmoil has spread globally. We at the Treasury Department are closely tracking write-downs and losses that international financial firm have publicly disclosed. By our count, it now tallies over $200 billion. Only about half of this is reported by U.S. financial institutions; European institutions report another $75 billion and the rest is accounted for by banks in Asia, Canada, and elsewhere. Last August, as the turmoil spread to Europe, we realized that we needed not just a U.S. response, but a global response. And what better mechanism to address the situation than the Financial Stability Forum – known as the FSF? And if you are keeping count, it is the work of the FSF that I consider the fourth step that we are taking. The FSF was formed by the Group of Seven finance ministers and central bank governors in 1999 after the Asian financial crisis. The FSF is a unique body. It brings together supervisors, central banks, finance ministries, the IMF and World Bank, and international regulatory groups. Together, the members of the FSF assess international financial system vulnerabilities, identify actions needed to address these vulnerabilities, and help coordination among authorities responsible for financial stability. In short, the FSF is the coordination link between the global phenomenon of capital markets and the national system of regulatory entitities. In October 2007, the G7 tasked the FSF to analyze the causes of the financial turbulence and recommend actions to address them. At last month's meeting in Tokyo, the FSF presented an interim report to the G7 finance ministers and central bank governors. The interim report identified six main policy directions.
These are just the highlights from the FSF's interim report. The G7 finance ministers and central bank governors in Tokyo in February welcomed the report and the solid progress that the FSF is making. The chairman of the FSF, Mario Draghi, is doing an excellent job and providing great leadership to a complex area. The FSF will gather again this month and the final report is scheduled to be released at the April G7 meetings here in Washington. In addition to the FSF, the European Commission, UK Prime Minister Gordon Brown, and German Finance Minister Peer Steinbrück have been offering proposals. The leaders of four major European countries and the President of the European Commission also met and issued a joint communiqué with a variety of suggestions. These ideas largely cover areas that are within the six overarching policy directions identified by the FSF and its framework. These efforts underscore that the questions raised by the current market turmoil are complex. And given that volatility in the markets continues, the diagnosis, recommendations and ultimately solutions to those problems will need to be nuanced, probably won't be complete upon first draft, and must not impair future capital market efficiency or innovation. These are global issues that require bilateral and multilateral cooperation and we will continue to work closely with the G7 and the FSF on a wide range of issues to ensure that policy responses are coordinated. Thank you.
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