It is also impressive and relevant that the pace of financial integration for advanced economies was much faster than that of their trade integration from the early 1990s onwards. This is evidenced by the ratio of the sum of external assets and liabilities to the sum of exports and imports [see Chart 6]. Interestingly, this same ratio has been roughly stable for emerging market economies and developing countries over the same period. Finally, another pertinent indicator measures the extent and rapidly growing importance of the total cross-border bank assets and liabilities since the early 1990s, which increased fivefold from about 5 trillion US dollars in 1990 to almost 25 trillion US dollars in 2006. [Chart 7]. Globalisation and the development of financial markets The fast pace of financial globalisation has reflected, and at the same time has contributed to, the rapid development of financial markets. Both financial integration and development have been driven by several factors: deregulation, capital liberalisation, financial innovation and advances in communication and information technology. These factors have contributed, in a mutually reinforcing manner, to the exceptional growth of the overall size of financial markets relative to GDP [Chart 8] and the consolidation of the banking sector, with the emergence of large and complex financial institutions. They have also contributed to the exponential growth of new financial instruments, the adoption by banks of the “originate and distribute” business model and the increasing presence of new financial intermediaries.

But this can be partly or wholly offset if households and businesses lack confidence in the long-term fiscal outlook for our nation. It would be greatly beneficial if the Administration and Congress could more effectively work together to craft a coherent fiscal policy. As I see it, this would consist of two elements – continued near-term fiscal support to underpin economic activity and long-term fiscal consolidation to ensure debt sustainability. Without action in Washington, fiscal policy will turn sharply restrictive in 2012 – exerting a direct drag on real GDP growth of more than one percentage point. At the same time, the long-term path under current policy is unsustainable. It should be possible, even in a time of sharp ideological differences, to agree on some common pro-growth principles: support for demand today made possible by credible longterm fiscal consolidation, and a mix of fiscal adjustments that are supportive of future growth. This would involve making an appropriate distinction between outlays that support current consumption versus outlays that lift the economy’s long-run potential such as investment in infrastructure, research and human capital – similarly, between taxes that inhibit work and investment versus those that are more neutral in their impact. Broadening the tax base and making tax system simpler might also be helpful. Progress on the fiscal front would have an important ancillary benefit – a demonstration that Washington can put aside partisan interests and step up to the challenges our nation faces would boost household and business confidence.