Globalization

THE GLOBALIZATION OF FINANCE

Alan Greenspan
As a result of very rapid increases in telecommunications and computer-based technologies and products, a dramatic expansion in crossborder financial flows and within countries has emerged. The pace
has become truly remarkable. These technology-based developments
have so expanded the breadth and depth of markets that governments,
even reluctantones, increasingly have felt they have had little alternative but to deregulate and free up internal credit and financialmarkets.
In recent years global economic integration has accelerated on a
multitude of fronts. While trade liberalization, which has been ongoing
for a longer period, has continued, more dramatic changes have occurred in the financial sphere.
World financial marketsundoubtedly are far more efficient today
than ever before. Changes in communications and information technology, and the new instruments and risk-management techniques
they have made possible, enable an ever wider range of financial
and nonfinancial firms today to manage their financial risks more
effectively. As a consequence, they can now concentrate on managing
the economic risks associated withtheir primary businesses.
The solid profitability of new financial products in the face of their
huge proliferation attests to the increasing effectiveness of financial
markets in facilitating the flow of trade and direct investment, which
are so patently contributing to ever higher standards of living around
the world. Complex financial instruments—derivative instruments, in
one form oranother—are being developed to take advantage of the
gains in communications and information technology. Such instruments would not have flourished as they have without the technological
advances of the past several decades. They could not be priced properly, the markets they involve could not be arbitraged properly, and
Gate Journal, Vol. 17, No.3 (Winter 1998). Copyright © Cato Institute. Allrights reserved.
Alan Greenspan is Chairman of the Federal Reserve Board. This paper is an edited
version of his keynote address at the Cato Institute’s 15th Annual Monetary Conference,

October 14, 1997.
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the risks they give rise to could not be managed at all, to say nothing of
properly, without high-powered data processing and communications
capabilities.

NewChallenges
Still, for central bankers with responsibilities for financial market
stability, the new technologies and new instruments have presented
new challenges. Some argue that market dynamics have been altered
in ways that increase the likelihood of significant market disruptions.
Whatever the merits of this argument, there is a clear sense that the
new technologies, and the financialinstruments and techniques they
have made possible, have strengthened interdependencies between
markets and market participants, both within and across national
boundaries. As a result, a disturbance in one market segment or one
country is likely to be transmitted far more rapidly throughout the
world economy than was evident in previous eras.
In earlier generations information moved slowly,constrained by
the primitive state of communications. Financial crises in the early 19th
century, for example, particularly those associated with the Napoleonic
Wars, were often related to military and other events in faraway places.
An investor’s speculative position could be wiped out by a military
setback, and he might not even know about it for days or even weeks,
which, from the perspective ofcentral banking today, might be considered bliss.
As the 19th century unfolded, communications speeded up. By the
turn of the century, events moved more rapidly, but their speed was
at most a crawl by the standard of today’s financial markets. The
environment now facing the world’s central banks—and, of course,
private participants in financial markets as well—is characterized by
instant...