Structural Changes and Key Issues in the Globalization of Financial Markets

In November 2004, speaking at the European Banking Congress in Frankfurt, Federal Reserve Chairman Alan Greenspan discussed the globalization of financial markets in light of the significant decline in home bias of investment over the past decade, and the simultaneous growth of America’s external imbalance.1 Even if policy initiatives fail to reduce the cumulative current account deficits, he said, the risk of triggering crises is small, since the U.S. and other advanced economies have grown flexible enough for market forces to eventually restore a sustainable U.S. balance of payments. On the other hand, he warned, if the present trend continues unchecked, foreign investors may at some point start to lose their appetite for dollar assets.