progress. if we go back and think of the thai, korean or indonesian crises, we can see the problem if there is no formal system of burden sharing. once the currency doubts started, shortterm lenders knew that if they could get their money out fast enough they would minimise currency losses and loan losses. so when each loan had to be rolled over it was not renewed, and capital flowed out. each day this happened the exchange rate came under further downward pressure, which encouraged further capital flight. everyone wanted to be out before the point was reached where the exchange rate was so low, interest rates were so high, and insolvencies were so rife, that those who could not get out of the door would be big losers. this process ensured the maximum fall in the exchange rate. something clearly has to be done in terms of managing the crisis to reduce the incentives for everyone to try to be the first one out of the door. some system of standfast followed by an orderly workout involving rollovers, reschedulings and, in extreme cases, debt equity swaps is clearly required. no country wants to be the first one to do this, and unilateral action could cause panic in other countries a la russia. what is needed is a system that involves cooperation between the host country, private lenders and the imf. we saw an example of how effective this can be for korean bank - to - bank debt late last year. ideally, this should not be on an ad hoc basis, as it was in korea, but should be thought out well in advance, with the possibility of such workouts included in loan documentation. this, of course, would increase the cost of borrowing by emerging market economies, but that would be no bad thing. one of the problems over the last five years was that it became too cheap and too much of it was done. it would be better than excessive lending followed by capital flight as we have seen over the past few years. this is all becoming reasonably conventional thinking now and, as i said, it is contained in the third working party report of the g22. but it was not that long ago that any suggestions along these lines were greeted with the response that it was out of the question because it involved interfering with the free movement of capital. i would like to conclude by mentioning two other things that have changed over the past year. first, hedge funds. as recently as three months ago if you complained about

a big change in attitudes and perceptions about financial risk. although confidence in global markets has partly returned, risk appetite now is clearly not what it was. and certain kinds of financial activity, particularly in wholesale, securities and derivatives markets have settled at much lower levels than they were in the pre - crisis period. all of this raises the question as to what the new normal might look like in our financial systems. has the world changed forever? to what extent can we expect the earlier causal factors driving financial change to reassert themselves? in thinking about this, i find it useful to categorise these causal factors into three groups. i see these as being conceptually distinct even though they are likely to interact in complex ways in practice. in the first group are the long - run forces driven by trends in incomes, technology and demographics. viewed in the abstract, there are a number of reasons to think that financial activity might be able to grow faster than the general economy for sustained periods, and even that this configuration might be some kind of norm. on the demand side it seems plausible that, as people get richer, more of their income can be spent on financial services, including debt servicing, as proportionately less needs to be spent on necessities. associated with this, the relative value of scarce assets that are financed by debt might be expected to rise over time. and the combination of increasing wealth and greater longevity in our societies is likely to generate rising demand for services in the wealth management and retirement income sector. on the supply side, the key point is that finance is an information - intensive industry. its key outputs depend on the capacity to store, analyse and transmit information securely. we ’ re not actually very good at measuring the real value of financial outputs and hence not good either at measuring productivity in the sector. but it would be surprising if the ongoing advances in information technology were not generating significant growth in finance industry productivity relative to that in less information - intensive sectors. this is a process that can continue as long as the technology itself goes on improving. so there are some valid reasons to think that both supply and demand for financial services can grow faster than nominal incomes over time, other things being unchanged. the second set of forces to consider are the one - off factors that made this particular quarter century, in financial terms, unique. one of these i have already alluded to : the financial deregulation that took place around the world mainly in the late 1970s and early 1980s. fundamentally