from The Australian, at: http://www.theaustralian.com.au/index.asp?URL=/national/4332599.htm Rewrite the rules, bank chief urges By economics correspondent IAN HENDERSON 26nov98 CURRENCIES of even the best-managed economies such as Australia would remain vulnerable to hedge-fund attack unless international financial system managers changed the rules, Reserve Bank governor Ian Macfarlane said last night. Challenging the orthodox view that totally free markets would invariably deliver correctly priced currencies, the central bank chief supported a slower pace of financial market liberalisation for emerging than for developed economies. "Attempts by academic economists to persuade (the public) that the free market always, or nearly always, gives the correct equilibrium price are unconvincing," Mr Macfarlane declared. The public's scepticism towards that view was well-placed, he added. His remarks, to the Committee for Economic Development in Australia annual meeting dinner in Melbourne, followed high level meetings in Washington last month and among APEC leaders in Kuala Lumpur last week that failed to finalise a detailed response to the global financial and economic crisis. Countries with newly emerging markets should not be expected to embrace full deregulation and the virtually unfettered markets that had taken developed economies decades to introduce, Mr Macfarlane said. "What is good for us after a long period of evolution need not be good for another country at a much earlier stage of that evolution." He urged emerging market countries to shun restrictive controls on inward and outward capital movements. Warning that unchecked instability in the international financial system could undermine confidence in the system itself, Mr Macfarlane stepped up his previous call for tougher oversight of hedge funds, which he blamed for the slump in the value of the Australian dollar in June. He said hedge funds � able to borrow and spend extremely high levels of funds using a narrow capital base � had become "the privileged children of the international financial scene, being entitled to the benefits of free markets without any of the responsibilities." The recent activities of one hedge fund � Long Term Capital Management � had so threatened the stability of the US financial system that the country's central bank was forced to organise a rescue mission, and to cut interest rates in a pre-emptive move to sustain economic growth. But Mr Macfarlane said the destabilising activities of overseas hedge funds had already wreaked havoc in local currency markets, where the Australian dollar was driven to 12-year lows against the greenback in June and again in late August-early September. "Our reconstruction of the transactions that hedge funds undertook in Australia in June suggests that they could engage in almost infinite leverage in their off-balance-sheet transactions if they so chose," Mr Macfarlane warned. With sophisticated economies � as well as the emerging economies � vulnerable to hedge fund attack, the Reserve Bank believes the arrangements in use under international agreements to supervise banks and their off-shoots need urgent upgrading. "The degree of instability, if it continues unchecked, could lead many participating countries to question the whole legitimacy of the system," Mr Macfarlane said. In the RBA's latest public contribution to the debate about solutions to the worldwide financial markets crisis, Mr Macfarlane sharply attacked the stringent conditions attached to the international bailout package for Indonesia's troubled economy. Leftlink - Australia's Broad Left Mailing List As vilified, slandered and attacked by One Nation mailto:[EMAIL PROTECTED] http://www.alexia.net.au/~www/mhutton/index.html Sponsored by Melbourne's New International Bookshop Subscribe: mailto:[EMAIL PROTECTED]?Body=subscribe%20leftlink Unsubscribe: mailto:[EMAIL PROTECTED]?Body=unsubscribe%20leftlink
