whether as private sector participants or as policy officials - have been endeavoring to understand the sources of instability that have flared up at times in recent years. it certainly appears to be the case that many open emerging market economies that have become active participants in the global economy over the past decade or so were exposed to a huge expansion in capital inflows that their economic and financial systems were not yet ready to absorb. these flows had been engendered by the increasing diversification out of industrial country investment portfolios, induced in part by significant capital gains prior to the onset of the crisis in east asia. net private capital inflows into emerging markets roughly quadrupled between 1990 and 1997. such diversification was directed particularly at those economies in asia that had been growing so vigorously through the 1970s, 1980s, and into the 1990s - the so - called “ asian tigers ”. in the event, these economies were ill - prepared to absorb such volumes of funds, especially, as i shall shortly argue, because there were inadequate alternatives to banks for financial intermediation backup. more generally, there were simply not enough productive investment opportunities to yield the returns that investors in industrial countries were seeking. it was perhaps inevitable then that the excess cash found its way in too many instances into ill - conceived and unwisely financed ventures, including many in real estate. what appeared to be a successful locking of currencies onto the dollar over a period of years in east asia led, perhaps not unexpectedly, to large borrowings of relatively cheap dollars that, in turn, were lent unhedged, at elevated domestic interest rates that reflected unheeded devaluation risk premiums. when the extent of such unhedged dollar borrowings finally came to be recognized as excessive, as was almost inevitable, the exchange rate broke. although it might seem that the full consequences were predictable, they were not. problems with imprudently financed real estate investments emerge with chronic frequency around the globe without triggering the size of the collapse experienced in east asia in 1997. in the case of the east asian economies, the magnitude of the crisis became evident only when the normal economic buffers that are available to absorb shocks were so readily breached under pressure. it has taken the long - standing participants in the international financial community many decades to build sophisticated financial and legal infrastructures that buffer shocks and limit systemic fallout from market disturbances. those infrastructures discourage speculative attacks against a well - entrenched currency because financial systems are robust and are able

ben s bernanke : promoting research and development – the government ’ s role speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the conference on “ new building blocks for jobs and economic growth ”, washington dc, 16 may 2011. * * * i am pleased to speak at this conference on new building blocks for jobs and economic growth. the conference organizers have gathered an outstanding group of participants and have set an ambitious agenda. the topics you will address today and tomorrow, bearing on innovation and intangible capital, are central to understanding how we can best promote robust economic growth in the long run. i won ’ t have to spend much time convincing this audience of the importance of long - run economic growth. the nobel prize - winning economist robert e. lucas, jr., wrote that once one starts thinking about long - run growth and economic development, “ it is hard to think about anything else. ” 1 although i don ’ t think i would go quite that far, it is certainly true that relatively small differences in rates of economic growth, maintained over a sustained period, can have enormous implications for material living standards. a growth rate of output per person of 2 – 1 / 2 percent per year doubles average living standards in 28 years – about one generation – whereas output per person growing at what seems a modestly slower rate of 1 – 1 / 2 percent a year leads to a doubling in average living standards in about 47 years – roughly two generations. compound interest is powerful! of course, factors other than aggregate economic growth contribute to changes in living standards for different segments of the population, including shifts in relative wages and in rates of labor market participation. nonetheless, if output per person increases more rapidly, the prospects for greater and more broad - based prosperity are significantly enhanced. over long spans of time, economic growth and the associated improvements in living standards reflect a number of determinants, including increases in workers ’ skills, rates of saving and capital accumulation, and institutional factors ranging from the flexibility of markets to the quality of the legal and regulatory frameworks. however, innovation and technological change are undoubtedly central to the growth process ; over the past 200 years or so, innovation, technical advances, and investment in capital goods embodying new technologies have transformed economies around the world. in recent decades, as this audience well knows, advances in semiconductor technology have radically changed many aspects of our lives, from communication to health care. technological developments