private investment spending. to date, the u. s. current account deficit has been financed with little difficulty. although the foreign exchange value of the dollar has fallen over the past year, the decline generally has been gradual, and no material adverse side effects have been visible in u. s. capital markets. while demands for dollardenominated assets by foreign private investors are off their record pace of mid - 2003, such investors evidently continue to perceive the united states as an excellent place to invest, no doubt owing, in large part, to our vibrant market system and our economy's very strong productivity performance. moreover, some governments have accumulated large amounts of dollar - denominated debt as a byproduct of resisting upward exchange rate adjustment. nonetheless, given the already - substantial accumulation of dollar - denominated debt, foreign investors, both private and official, may become less willing to absorb ever - growing claims on u. s. residents. taking steps to increase our national saving through fiscal action to lower federal budget deficits would help diminish the risks that a further reduction in the rate of purchase of dollar assets by foreign investors could severely crimp the business investment that is crucial for our long - term growth. the large current account deficits and the associated substantial trade deficits pose another imperative - the need to maintain the degree of flexibility that has been so prominent a force for u. s. economic stability in recent years. the greatest current threat to that flexibility is protectionism, a danger that has become increasingly visible on today's landscape. over the years, protected interests have often endeavored to stop in its tracks the process of unsettling economic change. pitted against the powerful forces of market competition, virtually all such efforts have failed. the costs of any new protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy. consequently, creeping protectionism must be thwarted and reversed. * * * in summary, in recent years the u. s. economy has demonstrated considerable resilience to adversity. it has overcome significant shocks that, in the past, could have hobbled growth for a much longer period than they have in the current cycle. as i have noted previously, the u. s. economy has become far more flexible over the past two decades, and associated improvements have played a key role in lessening the effects of the recent adverse developments on our economy. looking forward, the

% of gdp in korea. these numbers far exceed the ratios of roughly 20 % of gdp that prevailed in mexico, argentina, and brazil, countries that also experienced considerably slower domestic loan growth in the years preceding the recent crisis. the systemic risks implied by weak regulation may be much more severe in countries with relatively large banking systems. this observation is not unique to developing countries. even japan, one of the world ’ s advanced industrial countries, has struggled with a bad - loan problem, partially because of massive bank lending in an environment of inadequate prudential supervision. moreover, countries where the banking system is large relative to gdp may be forced to endure more severe macroeconomic disruptions when a banking crisis actually occurs, since the costs of cleaning up the crisis are likely to be large compared with the size of the economy and firms are likely to be highly dependent on banks for the provision of credit. in light of these considerations, it is perhaps not surprising that asian financial institutions were hit harder by the crisis than latin american institutions. for example, thailand was forced to close dozens of finance companies, and deep financial problems in two of korea ’ s largest banks persuaded the authorities to temporarily nationalize those institutions. in addition, an enormous bad - loan problem in thailand and indonesia - and to some extent in the other asian crisis countries, including korea emerged after the crisis, thus creating uncertainty about the future economic performance and financial viability of these economies. in contrast, major latin american countries moved to strengthen their financial systems following the peso crisis in the mid - 1990s. as a result, banks in these countries appear to have sustained minimal new damage. argentina is a notable example : efforts to strengthen the financial position of the banks, coupled with improvements in prudential regulation, have allowed the banks to remain relatively healthy, despite the effects of the crisis and the country ’ s protracted recession. this discussion suggests that financial system vulnerabilities probably were more severe in asia than in latin america. such a conclusion, however, does not necessarily imply that asian financial institutions were fundamentally less efficient or effective, only that they were more vulnerable when the crisis hit. 3 suffice it to say that policymakers in latin america also are wrestling with sizable financial sector problems. a third hypothesis is that the crisis hit asia harder because investor sentiment shifted more abruptly than it did in latin america. in other words, one might be asked - did the crisis somehow reveal comparatively more information about the performance of the asian developing countries and