As keynote speakers at the inaugural FT Asian Financial Centres Summit in Seoul, Alan Greenspan, former US Federal Reserve chairman, and Rudolph Giuliani, the former mayor of New York, answered questions on the future of financial centres.

The following is a transcript of the Q&A with Mr Greenspan, who answered questions about the competitiveness of Asia’s financial hubs, corporate governance regulations, high valuations of global assets, and world trade imbalances.

Click here for the transcript of the Q&A with Mr Giuliani, who answered questions about the industrial protectionism in the US, the trade disputes between China and the US, and the venture capital industry in Asia.

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Question: Does Sarbanes-Oxley need revision?

Actually, I think the base of Sarbanes-Oxley is a definite advance in corporate governance in the US. There are sections of the bill which were put together rather quickly, in particular Section 404 for example which creates a heavy burden on the accounting system and is particularly an anathema to foreigners who would essentially be issuing or endeavour to issue initial public offerings and other stock in the United States, and have in the last couple of years chosen not to.

My impression is that there will be changes - not so much because of the foreign issues that are involved here but the fairly significant concern domestically whether the amount of supervision, regulation and reporting is more than what was necessary to address the very real problems we confronted in 2002 as a consequence of the corporate scandals which I’m sure you’re familiar with.

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Transcript of Q&A with Rudolph Giuliani
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Greenspan predicts US governance revamp
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Editorial comment: Greenspan’s advice
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Seoul pledges level playing field for foreigners
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FT report: Asian Financial Centres
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Question: You remember that the stock market fell 145 points the day after you mentioned “irrational exuberance”. Do you feel there’s any irrational exuberance in asset values in recent years?

I’m sorry I used that term. It’s one which does suggest a froth in the marketplace. I would hesitate to use it in today’s context, because clearly it’s usable only in the context where bubbles are emerging. You can have overvalued stock prices without there being irrational exuberance. I would think that in this particular stage - without forecasting one way or another which way the market is going – that however one views it, that irrational exuberance I think would be a stretch at this point.

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Question: We’ve seen various attempts of consolidation in the stock market, with the London [Stock Exchange] especially being the target of various bids from Deutsche Borse and even Macquarie Bank of Australia and lately Nasdaq. What’s your view? Is there a rationale for consolidation of the stock market, especially the US and European stock markets?

Nasdaq, as I understand it, has actually closed the transaction in which they paid for 15 per cent of the LSE, if my reporting sources are accurate. But I think what we’re looking at is quite similar to the problems that emerged with the New Orleans and New York cotton exchanges - that the volumes on the London Stock Exchange were not of sufficient level to actually [make it] the major player it could be.

I think that the obvious interaction of an American stock exchange and the LSE would create a much more effective platform for global transactions and the interchange of various listings. So I think there are synergies here which is the basic reason why there has been such considerable interest in the LSE merging or having an alliance with another vehicle for cross listings.

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Question: You mentioned earlier on that abundant liquidity is not a permanent feature. Can you explain why is that happening? How will that affect the growing economies in Asia?

I think it’s important to define what we mean by liquidity. As we experience it, it means there has been a significant increase in purchasing power - not necessarily for goods and services – but for all forms of assets and products. The market value of a stock or a bond could be used if one wanted to as a transaction vehicle to buy a passenger car or buy a residence or anything of that nature. We tend to use financial intermediaries who essentially purchase the primary security, stock or bond and issue transaction balances against it.

But I think the critical issue here is that the fundamental source of liquidity is largely in this particular context the rise in the market value of assets. Without getting into the issue of irrational exuberance, it is a fact that the market value of all assets worldwide excluding banking claims has been rising significantly faster than the nominal GDP of the world.

This has meant that we are creating very large quantities of purchasing power. But remember that what these market values are are capitalisation ratios of expected long term earnings. And because of this fact and for a number of reasons, we have had a very significant decline in real long-term interest rates and a significant fall in real equity premiums. We’ve had as a consequence of that a very substantial mark-up in the level of capital assets - mainly financial assets, real estate and other real assets as well.

A good part of this expansion is a direct function of the decline in real equity premiums, discount rates or whatever you wish to call the whole structure of returns, and that cannot go on indefinitely. We have already begun to see, for example in the risk area, credit spreads have dropped to the lowest levels in recent memory.

When you get risk premiums, equity premiums and the like at their lowest levels they’ve been at in a long time, there’s only one direction that they can go and that is up.

And when that happens and it will - I don’t know when and I doubt very much anyone does - asset prices begin to fall. It’s a wholly simple relationship which means as asset prices fall, so does liquidity. Liquidity disappears for exactly the same reason that it emerged in the first place. Investors change their long-term focus, time preference, their rate of discount and the mere fact of their doing that alters the values which as I said before can be used to transact for consumer products.

I don’t know when the liquidity issue, or extent of liquidity, is going to decline. But I am reasonably certain that what we are looking at today is an abnormal situation - a function of once in a generation, maybe once in 50 years - when you get changes of the nature in discount rates, either economic statistical discount rates, not central bank discount rates, of the order of magnitude that we’ve seen over the last 15-20 years.

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Question: How would you assess the international competitiveness of regional financial centres in East Asia such as Hong Kong and Singapore compared with the pre-eminent financial centres of London and New York? How would you assess Seoul as a potential competitor to Singapore and Hong Kong?

I think the problems of Hong Kong and Singapore do not exist in either of those two metropolitan areas. New York and London have such long histories and such a huge domestic market which enable them to become rather large.

Both Hong Kong and Singapore are extraordinarily effective financial centres. The fact that they have been able to make themselves the size they are considering the size of the economies with which they’re associated expresses how extraordinary both cities have been. I suspect that if they had a much wider base from which to deal they would be far larger and of greater importance in the international markets.

It’s going to be very interesting to see what the impact of the rapidly growing overall mainland [China] economy is going to have on Hong Kong. Obviously, there is the critical competition between Hong Kong and Shanghai, which will inevitably emerge and which is already in play. I don’t venture to say that I know how that is all going to come out.

Seoul is clearly in the earlier stages of development in this regard. Considering where Korea was a generation ago, to expect that it could have reached the status of Hong Kong and Singapore is clearly unrealistic. But considering much of what the [Seoul] Mayor Lee Myung-bak has just said, and what international experiences have been with Korea, I would suspect that Seoul would gradually make its way as a significant financial centre of the world economy.

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Question: As you know, countries like Korea that are heavily dependent upon exports have to intervene from time to time to defend their currencies from zealous appreciation vis a vis the Chinese yuan. In this regard, they are building up more US treasury securities than they actually need, perhaps restricting some of the funding that they could provide back into their own economy.

Is it time perhaps to consider some kind of Asian Plaza Accord where all the surplus nations get together and agree with China to all revalue their currencies together so that there is no disproportion between them, so that there’s no competitive disadvantage to any one country vis a vis China?

Having been exposed to negotiations in international markets since the mid-1970s, I think that if you put a group of people in the room and have them try to negotiate what you’re suggesting, there would be a remarkable amount of friction. I wonder, however, whether we’re on the right track in this respect.

One of the reasons why currencies appreciate is that their real underlying productive capability and productivity are rising vis a vis others. Take a look at Japan, it was’t all that long ago that the yen-dollar exchange rate was vastly different from what it is today. The yen firmed very dramatically over time as Japan moved from its fairly low level of economic activity after the end of World War II to what it achieved in the mid-1980s. I would be more inclined to think that world equilibrium is probably better reached by allowing a number of these countries which are showing extraordinary economic growth, and indeed in many cases twice the growth rate of developed nations, to allow their currencies to firm.

I realise what that does to competitiveness. But that’s the way markets work efficiently. Endeavouring to prevent the exchange rates from moving creates all sorts of distortions.

So my judgement would be that it’s very difficult to get an agreement between a number of major countries who have their own domestic political adjustments to make and find there is a single adjustment upon which all could agree. I find that most unlikely and indeed in my judgement probably ill-advised.