Vol. 20, No. 15
May 3, 2001
International currency stability focus of Hutchinson Lecture
Mitchell Hall was filled to overflowing as Paul A. Volcker, former chairman of the Board of Governors of the U.S. Federal Reserve System, gave the 2001 Hutchinson Lecture April 30.
Lecture series namesake Harry Hutchinson and his wife were in the audience along with students, faculty members, UD administrators, state representatives and business professionals as the man who orchestrated the nation's rescue from spiraling inflation talked about the financial community's role in globalization.
On stage with Volcker was Donald J. Puglisi, MBNA America Business Professor, who served as moderator of a panel that included Edward G. Boehne, former president of the Philadelphia Federal Reserve Bank, Anthony M. Santomero, its current president, and Delaware Rep. Michael Castle. The panelists were asked to respond to Volcker's talk and speak on the economy in general.
UD President David P. Roselle welcomed guests and took a few moments to talk about some of the things the University does to "return the wealth of experience we receive from our community," mentioning support of the development of a technology infrastructure in Delaware and the region and the business college's MBA Corporate Associates Program, which allows students to receive full scholarships while working 20 hours a week for local businesses. Roselle said that under Dean Michael J. Ginzberg, the college will expand opportunities to build partnerships with government, industry and education.
In introducing Volcker, Ginzberg told the packed theatre that when Volcker became chairman of the Federal Reserve in 1979, inflation was in double digits. When he left office in 1987, it was at 4 percent and still going down.
Volcker said it was an honor and challenge to be speaking in front of the man for whom the lecture series is named. He said he had looked through Hutchinson's economics text to see how he had been rated as a federal reserve chairman, but all he could find were two footnotes dealing with banking supervision.
Supervision is exactly what the former fed chairman recommended to speed economic globalization, which he labeled "a phenomenon that isn't going to go away." He predicted that one day, there will be just one world currency, but until then, something has to be done to keep the currencies of wealthy nations from extreme fluctuations.
Volcker said, if globalization is to work, the governments of developed nations such as Europe, the U.S. and Japan should take bold steps to stabilize their currency when it fluctuates drastically.
"Full participation in the world of global finance simply isn't consistent with independent monetary policies by independent nations," Volcker said.
He described what happened in 1998 when the economies of Asia and Russia faltered. He said it affected the investing and lending institutions of the Americas, Europe and Japan, putting them at risk and profoundly affecting developing nations.
"Countries like Thailand, Indonesia, Malaysia and others that had for decades experienced extremely high rates of economic growth...were suddenly plunged into deep recession." He said their recovery was so uneven that they have still not equaled the growth they experienced during the '80s and early '90s.
"The obvious difficulty has been enormous exchange rate instability and related gyrations in interest rates," he said, and that has led to "virtual destruction of domestic banking systems."
He explained that while economic globalization is advancing at a rapid pace, the ability of developing nations' banking systems to finance the convergence is limited.
Isolated and with little experience at risk management, lacking effective supervision and accounting systems with poorly developed and sometimes corrupt business practices, emerging nations' banking systems can't handle fluctuations in the economies and financial markets of developed nations.
But, he said the common reaction among officials and in financial markets has been to downplay the effect of big economy currency fluctuations as part of the growing pains of globalization with no need for intervention, something Volcker himself would have agreed with at one time.
"It is also true that my professional life extends over half a century and as Yogi Berra once said, 'You can observe quite a lot by watching.'"
From that vantage point, he said, he has become "skeptical to the point of disbelief" that the responses to the recent financial crises have been adequate.
The issue, Volcker said, is whether or not a world of global finance can exist in a free market.
Emerging nations are more dependent on imports and exports than the U.S., the European Union or Japan, so their economies are highly sensitive to large currency fluctuations that bring extreme changes in interest and exchange rates.
After Volcker's remarks, Puglisi called on Boehne, Castle and Santomero for comment.
Boehne said that only an ex-chairman of the federal reserve would be able to say something as provocative as local financial markets must be willing to give up their independence and merge to create first regional then national then global markets. He called Volcker a true economic genius.
Santomero said that commercial banking policies must have objectivity and that stabilization in world economies, integrity in commercial banking and financial systems and the development of pre-market standards are all needed. He disagreed with Volcker that wealthy nations should step in and regulate their currency fluctuations. Instead, he said, the market will discipline institutions. What is needed, he said, are greater transparency and more reliance on self-governance.
The U.S. has an economic infrastructure that could accommodate globalization, Castle said. Most of the nation's support systems needed for currency stabilization are in place, even if not perfect. He warned that Congress could do damage to the U.S. monetary and federal reserve systems by tampering with them.
Photo by KATHY FLICKINGER