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Jones fears Asian backslide
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September 4, 1998: 11:11 a.m. ET
Analyst says propping up markets could lead to more global turmoil
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NEW YORK (CNNfn) - In this time of market turmoil, many wonder if Alan Greenspan's laissez-faire approach to interest rates is enough to keep our economy from being the next sell-off victim.
David Jones, Fed watcher at Aubrey G. Langston, appeared on "Business Day" to talk about what he thinks the Fed should be doing, how Greenspan should address the Asian crisis.
Here's a partial transcript.
JOHN DEFTERIOS, CNN ANCHOR: There's a lot of pressure on Mr. Greenspan. He meets with Mr. Miyazawa in San Francisco, along with Robert Rubin, the treasury secretary. What can come out of that?
DAVID JONES, CHIEF ECONOMIST, AUBREY G. LANGSTON:: I don't think anything concrete, I'll say that up front. But the psychology for global markets of that meeting, as we've seen in this slight uplift today, is really important. What they have to show is that they are in the process of doing some work, particularly in the global banking system, starting with Japan. And if we can see some confidence-building architecture coming out of this, how do we deal with the Japanese banking crisis?
The Japanese government is still not being effective in doing that. Perhaps they're not spending enough money, not strengthening the strong banks enough, not closing the weaker banks. They've got to show at least a broad framework for work. And that's what this meeting is about. Remember, Japan asked for a G-7 meeting, all of the industrial countries of the world. They got only the U.S. for this meeting.
But it's going to be a critical moment because I think the markets will take a breathing spot. If you look at the common denominator of this crisis, it's turned into a significant global banking crisis. Starting with weak Asian banking, spreading to, obviously, the Russian banking system, which basically collapsed. And then, in sort of a sneaky way, hitting the Latin American economies and banking systems hard. And the trouble is you can't use a free market psychology here completely, because no one has control over this situation. No central bank is big enough. So at least they have to start to change psychology into rebuilding some confidence in the system.
DEFTERIOS: I wanted to discuss what's going on in Asia right now, with Malaysia swinging to a different type of economy. They're throwing up exchange controls, trying to basically rely on the local investor. That is a dangerous shift, is it not?
JONES: It really is. And people have missed it. It's absolutely true, John. The most important element of recent weeks in the global markets is this idea that we're going to go backwards. Instead of opening our economy up to global capital flows, and thus prosperity, along with some volatility certainly, we're going to close it down. We're going to shut it down. We're going to shut off exchange.
This is dangerous also for the banking system. Think about currency swaps and interest rate swaps and all kinds of complicated transactions that could, in fact, be cut off as a result. Hong Kong, by the way -- every time you quote the Hong Kong stock market, the first question is was the government pushing those prices up ... or not. And that becomes a critical issue, too. That's dangerous -- this meeting today should also at least comment on that.
DEFTERIOS: . Moody's today put China and Hong Kong on watch. Could that force China to leave the exchange controls, and not open up?
JONES: Well, that's the danger. They'll go backward instead of forward. There are two bad choices for China. Either devalue, which will give us another round of global instability, or retreat. Either one of those is bad. Bad for the global markets, and it's something that Chairman Greenspan and his fellow policy makers have to look at, even in this meeting in San Francisco. 
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