that every undertaking, however well - intentioned, is generally accompanied by unforeseen repercussions that can overshadow the principal intention. ” let me illustrate, continuing with my road analogy. in road development, one option to deal with a traffic - congested road is to build a bypass or an alternate road. unfortunately, building a bypass may decongest the existing road, but as often happens, with new developments in the area of the bypass, we would now have, instead of just one congested road, two traffic congestions. many analysts have said that “ the law of unintended consequences ” was working spectacularly in the run up to this current crisis. one evidence of this is the benign macroeconomic environment created by the low interest rate regime prevalent during the first half of this decade. this should be a good thing. however, this environment led to the search for higher yields, that fueled unprecedented asset price increases and at rates faster than the growth in household incomes. this further led to a loss of rationality ( individuals believing house prices would never fall ) and extension of credit by financial institutions to sectors of the economy that normally would not qualify to borrow ( in other words, the so - called “ subprime ” borrowers ). sounds familiar? this was what transpired in the united states – low federal funds rate fueling a boom in mortgages with borrowers having doubtful credit histories, housing prices bubbled and burst, with the negative feedbacks affecting both the u. s. domestic economy and financial markets. another example is in line with risk spreading through financial innovations. the ability to spread risk should also be a desirable goal. however, the fast - paced evolution of financial products and services, along with the seemingly “ loose ” financial regulation – later on gave way to the unfortunate reality that risks were eventually “ concealed ”. through securitization and deleveraging, those hidden risks were effectively multiplied in the process. thus, while financial innovations have good intentions, they also have some side effects … if not prudently monitored or given appropriate form of regulation. these developments, together with a host of other factors, fueled the current crisis, which from all angles, can be considered our first truly global crisis. from what was first believed to be a us - centric subprime mortgage problem, the crisis has since transformed into financial turmoil and further into an economic growth crisis. from the us and europe, it has spread to

the rest of the world. economies in the periphery suffered market failures characterized by sudden stops as sentiment turned, despite sound policies. even countries that did not have strong financial links with the core nations are now being affected through real flows and financial losses on trade activities. global crisis requires a global responses this brings me to my second theme – “ a global crisis requires a global response. ” when it had become evident that the economic events were not going to remain localized at the epicenter, advanced and emerging economies implemented policies and strategic actions, in concert and at the national level. some economies that have more monetary space have eased policy interest rates, reserve requirements and credit facilities. some that have more fiscal space boosted spending via stimulus packages and prioritization of important infrastructures. many have pursued both expansionary monetary and fiscal policies. some countries like australia and new zealand have implemented unlimited but temporary deposit guarantees and opened up us dollar swap lines with the fed. finding the right policy mix poses a continuous challenge, as economic managers and policymakers would have to deal with varying conditions, magnitude and depth of the crisis ’ effects. thus, the worldwide crusade to mitigate the impact of the current global financial and economic crisis continues its experimentation but with utmost caution for a wrong policy could eventually take its toll on the economy over the long - term horizon. no economy is immune, but buffers and cushions help lessen the impact the crisis has shown that no one is immune. this leads me to my third theme. no economy is immune but some economies fare better because of buffers built from past reforms and behavior. while our countries have been affected, it is noteworthy that the cushions we have painstakingly put in place before the current crisis unfolded have helped us weather the blows. allow me to name a few of these buffers. in the case of australia and new zealand, these economies have grown strongly for the past 10 years and inflation has been largely within the 1 to 3 % target band ; this has resulted in low unemployment, and a strong fiscal position. they also have good institutions. they scored highly on measures of ease of doing business, as well as measures of corruption / transparency. they also have flexible labour markets. they both have an established track record for transparency in regulatory institutions, sound management of the public accounts, and a forward - looking monetary policy are well - regarded internationally. finally, their banking system remained sound and well - capitalised. the large australian banking groups, of which the major new zealand