financial institutions, but rather to strengthen their supervisory framework through the implementation of internationally agreed principles. 2. effective and comprehensive supervision and regulation the final result of the reform of the international regulatory architecture will be a financial system with more and better - quality capital, enforced by appropriate micro - prudential standards. yet there ’ s a question we cannot avoid : would a stronger micro - prudential framework be enough to prevent a repetition of the events we experienced during the financial crisis? i don ’ t think so. higher and better capital and liquidity requirements are an essential condition to improve the stability of the financial sector. but they are not a sufficient condition per se, if not accompanied by a sweeping change in the orientation and practice of micro - prudential see “ bankers ’ ‘ doomsday scenarios ’ under fire ”, financial times, 30 may 2010. oversight. i believe that one of the most crucial lessons to be drawn from the crisis concerns the twin failures of : i ) light - touch regulation, and ii ) the narrow perimeter of regulation and supervision, excessively focused on the banking system and on the legal status of the supervised entities. we have observed many instances of supervisory failure in which supervisors did not fully understand the business models of the institutions they were overseeing or the nature, scope and location of the underlying risks. this has largely been due to the light - touch model of regulation and supervision, which has been proven ineffective because it failed to keep pace with financial innovation and with the financial sector ’ s capacity to dynamically alter the profile and the location of its risk exposures. i am convinced that the main failing of lighttouch regulation and supervision lies in its overwhelming reliance on rules. too much emphasis is placed on monitoring a mostly formal compliance with the rules. in other words, the light - touch approach to supervision is ineffective because it failed to recognise the powerful incentives of financial institutions to game what on the surface appeared to be wellintentioned and granular requirements. historical experience has demonstrated that supervisory emphasis on mechanical rules such as capital requirements may encourage perverse behaviour that ultimately leads to excessive risk - taking. why is this? in the absence of adequate supervision, banks have incentives and opportunities to game the rules by developing financial innovations that allow a shifting of risk beyond the perimeter of the regulated sector and by devising novel strategies which increase their exposure to risks but which, on the surface, appear compliant with the rules. since the introduction of the basel accord in 1988, supervisory authorities

accept these principles, however, important questions remain. for example, what is meant in practice by equality of economic opportunity? some might limit the concept to the absence of overt discrimination against particular individuals or groups, while others might extend the term to encompass universal access to adequate housing, education, and health care. another difficult question is how to balance the need for maintaining strong marketbased incentives, which support economic growth and efficiency but may be associated with greater inequality of results, against the goal of insuring individuals against the most adverse outcomes, which may reduce inequality but also tends to diminish the strength of incentives. no objective means of answering these questions exists. one can only try to understand the various issues and tradeoffs involved and then come to a normative judgment based on that understanding. i raise these questions of ethics and values because they are inextricably linked with the topic of my talk today, which is the level and distribution of economic well - being in the united states. as i will discuss, the average standard of living in this country has improved considerably over time. however, by many measures, inequality in economic outcomes has increased over time as well, albeit at varying rates. in the remainder of my remarks i will review these trends. i will discuss what economic research has to say about the sources of rising inequality and briefly consider some implications for economic policy. i will not draw any firm conclusions about the extent to which policy should attempt to offset inequality in economic outcomes ; that determination inherently depends on values and social tradeoffs and is thus properly left to the political process. trends in the level and distribution of economic well - being on average, and by almost any measure, americans have gained ground economically over time. for example, since 1947, the real ( that is, inflation adjusted ) hourly compensation of workers in the u. s. nonfarm business sector ( a measure that includes both earnings and benefits ) has increased more than 200 percent. in other words, the real reward for an hour of work has more than tripled over the past sixty years. 1 over the same period, real disposable income per capita has increased almost 270 percent, real consumption per capita has increased almost 280 percent, and real wealth per capita has risen 310 percent. we have also seen significant gains in other indicators of living standards, such as health and educational attainment. thus, in absolute terms, the well - being of most americans compares quite favorably with that of earlier generations and,