While some degree of forbearance may be unavoidable and even appropriate under the right conditions, it is at best a temporary measure. It is critical that forbearance not become institutionalized,  2  BIS Review 10/2001  but be tied directly to actions by both bankers and supervisors to address underlying problems. •  Governments are not good long-term asset managers. Prolonged government holding of impaired assets is not likely to enhance their value, nor aid in the restoration of market liquidity. •  Governments are not good commercial bankers. Delayed privatization of nationalized banks always means higher future costs, and usually inhibits fundamental reform. •  Government-directed lending means future fiscal losses. Similarly, efforts to stimulate credit growth by nonmarket forces in the context of a banking crisis at best buy additional time, and usually dig a deeper hole. •  Foreign investment in domestic financial sectors can yield important benefits. Foreign direct investment in the banking sector can provide much-needed capital resources, technology and knowledge transfer, and a more diversified capital and funding base in the event of future economic instability. •  Financial sectors are only as healthy as their borrowers. Without corresponding corporate sector restructuring, financial sector rescue efforts are likely to be necessary in the future. •  Strong financial systems depend on a reliable and credible legal system. In the absence of a strong legal system, borrowers lack appropriate incentives to repay. •  There are no "quick fixes" to financial sector problems.

Furthermore, no exchange rate regime can offer full insulation from cross-market spillovers, particularly where the free movement of capital is allowed. Nevertheless, certain policy combinations can make things far more dangerous. Fixed, but adjustable, regimes look to be particularly fraught with perils when combined with shortcomings elsewhere, not the least of which are the severe after-effects that always seem to follow their forced abandonment. As you are aware, much of the emerging world has moved toward floating rates in recent years. For Thailand and the other countries that have made the change in East Asia, it would appear that the new monetary/exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. Inflation is in the very low single-digit range in most of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short-term interest rates that have declined to historically low levels. 4  BIS Review 10/2001  Moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. But if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. In this regard, I would note that some countries, including Thailand, have looked to inflation targeting as a framework to accomplish that end.