Greenspan sees no sign of recovery in Asia yet

Greenspan sees no sign of recovery in Asia yet

WASHINGTON (Reuters): Pessimism is feeding on pessimism in Asia's deepening financial crisis and there is no sign yet of a recovery, U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday.

Greenspan, using strong language in testimony to the House of Representatives Banking Committee, said it was hard to predict when Asia's troubled economies would start to improve.

He described events in Asia as a vicious cycle -- the opposite of the virtuous cycle of growth and investment seen in the United States.

"You get an implosion of confidence in which pessimism feeds on pessimism," he said. "Everyone withdraws from activities related to an economy, trust ... falls and the situation feeds on itself in a downward spiral."

Countries in Asia and beyond are suffering from the fallout of the crisis, which started in Thailand just over a year ago.

Many, including regional powerhouse Japan, are already in recession and the yen is under pressure on doubts about whether a new government will carry out much-needed reforms.

But Greenspan gave no sign that the U.S. authorities were again ready to sell dollars to support the yen. He said intervention could not alter the value of a currency if the fundamentals pointed in the other direction.

"The presumption that we -- meaning the monetary authorities at the Fed and the Treasury -- can somehow alter the value of a currency in a significant manner when fundamentals are moving in the opposite direction is an illusion," he said.

Greenspan noted that economists had failed to predict the Asian crisis, and he was not ready to say when it would end.

"It will depend to a very substantial extent on a restoration of confidence and (that) will depend on the types of economic policies that these countries are involved with."

But Greenspan admitted he knew of no policies that could have done a better job than International Monetary Fund economic plans in improving the situation in Asia.

"I don't know what alternative policies could have been implemented which could have significantly altered the pattern that emerged once the vicious cycle began to accumulate to the degree that it did," he said.

The IMF put together rescue packages worth some $120 billion last year for Thailand, Indonesia and South Korea, draining its own reserves in the process. A fourth big deal -- a $22.5 billion package for Russia -- was approved last week.

Greenspan urged lawmakers to approve the U.S. contribution to new funding for the IMF and said attempts to reform the institution should wait until the crisis abated.

"We do not have the luxury not to have available an institution such as the IMF if it is necessary to fund the containment of the crisis," he said.

"When your house is potentially burning down and ... the sparks are going in your direction, your concern is to make sure that the fire does not spread. Tomorrow you can complain to your neighbor."

U.S. senators have approved an administration request for an additional $18 billion for the IMF, but the request has stalled in the Republican-dominated House. The House Appropriations Committee on Wednesday delayed discussion of the funding, probably until after the summer recess.