Finally, I believe that we must achieve these goals without attempting to step back to policy regimes of prior periods that are clearly unworkable now or that undermine the advantages that we know come with a free flow of capital. In overview, I would say that there probably are very few grandiose new solutions that need to be implemented as a policy response to today's global financial turmoil. Rather, I see an emphasis on basic, sound practices. One lesson suggested by the pre-1914 period of relative stability in capital flows is the importance of broadly understood and accepted institutional arrangements. Countries that wish to participate in the modern global financial market need to modernize their institutional underpinnings.
Several actions come to mind.
First, the basic underpinnings of private property protection need to be in place. The legal system needs to define and support the enforceability of contracts. For example, while international bankruptcy procedures do not seem feasible, the adoption or improvement of national bankruptcy systems is essential and should have a high priority. Debtors and creditors alike need to have an understanding of the rules under which private sector defaults are to be resolved and confidence that these rules will be consistently applied. I put the highest priority on bankruptcy procedures because they provide the self-adjusting mechanisms that allow the private sector to continue to function even in a world in which financial crises are likely to occur.