take this approach, either by an individual regulatory agency or even collectively. but, as with hypothesizing a functionally - based regulatory system more generally, hypothesizing a broadly applicable regulatory definition can usefully inform the direction of the current regulatory approach of activityby - activity scrutiny. of course, while the current approach allows for an ad hoc consideration of the particulars of each activity, it still requires at least a general filter for identifying sources of systemic risk. my own sense is that the greatest risks to financial stability lie in activities with vulnerability to funding runs and asset fire sales. these may be associated either with some of the same kinds of shortterm funding found in systemically important banking organizations or in the potential for rapid and substantial investor redemptions of their holdings in certain investment funds. where substantial leverage — either nominal or synthetic — is also present, the risks are only greater. efforts to calibrate these, and possibly other, risks will remain an important feature of shadow banking regulation, along with refining ways in which such risks may be mitigated. before turning to another, though related, set of questions, let me digress a bit to note another implication of a regime in which regulation is developed with a view to risks to the financial system as a whole. the motivation both for more stringent regulation of systemically important firms and for regulation of shadow banking arises in large part from the potential contribution of each to systemwide contagion. a complementary motivation for some macroprudential measures is the importance of maintaining effective financial intermediation even during a period of severe recession or financial stress. but this reasoning should, i think, move us toward less regulatory stringency for some parts of the financial system, as well as greater stringency in other parts. for example, as banking regulation is strengthened to take account of the progressively more systemic significance of larger or more complicated institutions, there is a good argument for a less demanding regime for smaller institutions whose contribution to systemic contagion would almost surely be somewhere between modest and inconsequential. this observation raises the issue, which i have discussed previously, as to whether even within a particular form - based area of financial regulation we should be moving toward quite different regimes. 4 the next set of questions raised by a systemwide perspective on financial regulation can be described much more briefly. it pertains to the appropriate target once a need for regulation has been established. the selection among, and mix of

us dollar is obviously not the goal of monetary policy. one important contribution to the ongoing deterioration of our current account balance is the tendency for us residents, for reasons not fully understood by economists, to have a higher propensity to import out of every dollar of income than do residents in the countries that are our major trading partners. this, of course, means that even sustaining trend growth both in the united states and in our trading partners will not necessarily close the trade gap. to do so would require a period of sustained stronger - than - trend growth overseas. many professional economists and market observers now question the sustainability of our current account deficit. i suggest that the combination of a large current account deficit and a strong us dollar is, in part, a reflection of the relative attractiveness of the us economy as a destination for foreign capital. we are attracting savings from abroad because we currently have a higher rate of return on investment than many other countries do. this state of affairs, of course, is a reflection of the factors that have given rise to this long period of domestic prosperity. how much longer prosperity can continue is obviously the key question. the answer depends on the ability of businesses and workers in the united states to continue to generate growing productivity increases. because few of us forecast the current period of investment - driven productivity increases, it is difficult to predict when it will end. we know only that, at some point, productivity will stop accelerating. but the potential for change is not the exclusive domain of the united states. the ability of other countries to adjust their systems of production to take advantage of new technologies will be an important determinant of when other markets will offer returns that are comparable to those available in the united states. i imagine that, seeing the gains that we have experienced from our capital deepening, investors would look for the earliest signs of a similar phenomenon in other countries. the one lesson we can offer is that the configuration of competitive and flexible markets, management focused on shareholder value, and supportive macroeconomic conditions is not achieved without costs in terms of some societal dislocations and that configuration requires good fortune, sacrifice and discipline. conclusion as you can see, these are interesting times in which to be a central banker. this complex set of forces requires continued vigilance on our part. additionally, the last 24 months have raised an important set of questions regarding measures of real economic performance, the behavior of inflation, financial market indicators, and the growing globalization of today ’ s economy