The root causes of the financial turmoil in the United States are similar to the crisis that gripped Asia 11 years ago, but may be harder to fix, Thailand's central bank governor said on Saturday. Speaking to Asian central bankers gathered in Bangkok for a weekend symposium.
Bank of Thailand chief Tarisa Watanagase said central banks would need to be flexible in their response to the US crisis as its effects ripple around the world. "At a glance, the root causes of both events are strikingly similar," Tarisa said in evoking memories of the 1997-98 Asian financial meltdown triggered by the devaluation of the Thai baht.
"Investors taking excessively high risks, creating asset price bubbles, against a background of lax prudential and monetary policy," she said.
However, the crisis today is much more complex because it is unfolding in the world's biggest economy with the deepest and most sophisticated capital markets, Tarisa said. "Given the increased complexity and magnitude of the current crisis, this calls into question whether the tools at hand for policymakers are adequate in ensuring economic stability, the essence of our mission as central bank governors," she said.
Tarisa said innovative methods would be needed to deal with the evolving challenges. "For example, we may not be able to just rely on using traditional solutions of raising interest rates to address rising inflation." Policy responses may include "prudential measures that could help cool down asset prices, which is a case in point of how monetary and supervisory policies can be intertwined," she said.
The Southeast Asia, Australia and New Zealand (SEANZA) Governors' Symposium, a three-day training seminar, was scheduled before the turmoil in the US banking system triggered panic on world stock markets.
Tarisa welcomed the plan being drawn up by US authorities to buy the bad debt undermining financial firms. "It should be a better idea to resolve problems in US financial markets in a more sustainable and systematic manner, rather than dealing with them with piecemeal measures. But we still need to look at the details," she told reporters. Other participants declined comment on the plan.
The 20-member group includes the central banks of Japan, China, Australia, India and several South Asian and Southeast Asian countries. It was set up in the 1950s to promote co-operation between central bankers in the region.
The collapse of investment bank Lehman Brothers and the $85 billion US government bail-out of insurer AIG this week have knocked Asian banking stocks and prompted central banks to pump funds into strained money markets. Commercial banks in Asia have seen their shares caught up in the downdraft, but they have largely dodged the huge credit losses that have rocked Wall Street.
Tarisa said Asia in general had been little affected so far. "Asian countries have co-operative arrangements in place for facing such a situation, such as currency swap arrangements and standby credits that each can take from the others," she told reporters. While the region has ample liquidity, the Asian Development Bank has warned that asset markets, particularly real estate, were vulnerable to shocks.
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