given the uncertainties around economic forecasts that far into the future, it would be highly desirable for the fiscal authorities to put in place a medium - term program of fiscal consolidation now, while market conditions are benign. at the same time, i think we must be careful and not focus exclusively on the imperative of fiscal consolidation. that is because fiscal policy adjustments have important implications for the 2011 remittance figure is a preliminary unaudited estimate. bis central bankers ’ speeches the level and composition of economic activity more broadly – both here and abroad. if we must undertake fiscal consolidation – and over time we must – then we need to be cognizant that this adjustment will need to be accompanied by other offsetting changes in the composition of economic activity in our and the global economy. 2 one way of illustrating these interrelationships is to use the following accounting identity, which imposes an adding up constraint on the overall economy : if you define private - sector net saving as the private balance and public sector net saving as the public balance, then : private balance + public balance = current account balance. at the outset of the financial crisis, the private balance, which was negative, swung sharply into surplus, and this was largely accommodated by a decrease in the public balance – in other words, an increase in the government deficit. recently, 3 this accounting identity looked roughly like this : 6. 5 % of gdp private balance + ( – 9. 5 % of gdp ) public balance = – 3 % of gdp current account balance realistically, the public balance 4 needs to be reduced to about – 3 percent of gdp over the next five years or so for the ratio of federal debt held by the public - to - gdp to stabilize around 75 percent to 80 percent of gdp. one might reasonably do more, but this just strikes me as the minimum adjustment that would be prudent and sustainable. this requires a large change from where we are today. for the accounting identity to continue to hold, which it must, there needs to be sizable shifts in the private balance and / or the current account balance. this is not a policy choice – it is basic math – but policy choices can help ensure that the adjustments take place in a way that is supportive of economic activity. the private balance can be further divided into two pieces – the household balance and the business balance. currently, for the united states, the household balance is about 2. 5 percent of gdp and the business balance is about 4 percent

, but uncertainty is greater because much of the recent innovation has occurred against the backdrop of general economic stability and a sustained period of low credit losses, low risk premia and low implied volatility across many asset classes. this means that some aspects of the financial system today have not yet been subjected to the more exacting tests of macroeconomic or financial stress. this makes it harder for the conventional array of risk management tools to capture the actual risk faced by financial institutions today. the challenge we face is not simply in determining whether we are better off today than we were at past periods of considerable stress in the financial system, but also in assessing how well positioned the current system is to deal with prospective sources of stress. that assessment is harder to make today because of the changes now underway in the nature of financial intermediation and the overall conditions in which these changes have occurred. several examples of these changes are worth noting : the more critical role played by hedge funds and other nonbank financial institutions in credit and other markets has the potential to magnify the impact of distress in those institutions on market dynamics and liquidity if counterparty risks are not managed appropriately. the proliferation of new forms of derivatives and structured financial products has changed the nature of leverage in the financial system. the addition of leverage imbedded in financial instruments to balance sheet leverage has made this source of potential risk harder to assess. new players, new products and more dynamic ways of intermediating and managing credit may increase the sensitivity of balance sheets and income - to - market volatility and potentially amplify the impact of a sharp change in perceptions about macroeconomic risk or credit on asset prices and liquidity. the increased international integration of both capital and goods markets has brought a huge increase in the scale of cross - border financial activity. the largest global financial institutions now play significant roles in a large number of financial systems outside of their home market. these changes are likely to affect the manner in which financial shocks in one region are propagated to other regions. finally, we have witnessed an increase in the degree of concentration in some markets, a development that has the potential to make the system more vulnerable to the deterioration in conditions at one of the major bank or nonbank financial intermediaries. the degree of systemic risk presented by these changes depends importantly on two things. it depends on the robustness of the infrastructure that supports these markets. and it depends on the level of reserves, capital, margin and collateral that the major