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Greenspan warns of risk
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April 14, 2000: 1:14 p.m. ET
Fed chief ponders new financial instruments, saying caution is needed
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NEW YORK (CNNfn) - In a world where new financial instruments emerge nearly every day, the nation's central bank needs to keep a watchful eye over the risks these complicated securities bring, Federal Reserve Chairman Alan Greenspan said Friday.
In remarks to an economic conference, Greenspan spoke about technology's role in creating a vast array of financial securities such as derivatives which allow institutions to take and hedge risk, creating wealth in ways never before possible.
In his fourth speech in five days, this one in Washington, D.C., he alluded to the need to monitor these risks, saying banks need to set aside more reserves, on a day when the Nasdaq composite index fell for the fifth time in five trading sessions, erasing billions of dollars in paper wealth.
"Yet the dangers of too much leverage are all too evident," he told the Journal of Financial Services Research and the American Enterprise Institute Conference.
Greenspan remained vague over exactly what role government and private institutions should take in regulating the ever-expanding world of derivatives, a world so arcane that the Chicago Mercantile Exchange lets institutions take positions on the weather in nine American cities.
"To paraphrase my former colleague, Jerry Corrigan, the advent of sophisticated risk models has not made people with gray hair, or none, wholly obsolete," the 74-year-old and world's most powerful banker said.
For years, Greenspan has touted technology's effect on increasing American productivity. Those productivity gains have allowed corporations to keep costs down, leading to surprisingly low inflation that has helped the economy enter a record 109th month of expansion this April.
On Friday, he praised technology's creation of new ways to make financial bets while protecting against losses.
"Without doubt, the acceleration in technology that has produced such an extraordinary effect upon our economy in general has had a particularly profound impact in expanding the scope and utility of financial products," he said.
Still, caution is called for.
"The outcome of this process may well be the recommendation to set aside somewhat higher contingency resources -- reserves or capital -- to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence," he said.
Stocks have tumbled this week, but despite the fed chief's many appearances, analysts say his remarks have had no discernable market impact. He made no mention of the recent turmoil Friday. 
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Federal Reserve
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