is an inflation rate so low as to be undesirable. mere announcements are not in themselves enough, of course, and have to be backed up by credible policy actions, and in countries where chronically weak demand is already accompanied by flat or falling prices, not all of these actions will necessarily be in the realm of monetary policy. but to be clear that policy is seeking to maintain, or to return to, low but above zero inflation is probably a necessary, even if not sufficient, condition for adequate outcomes. experience of previous periods of deflation in our own countries ( admittedly not first hand for most of us here ) and observation of japan ’ s travails in the past decade, also points to the importance of financial structure. this leads naturally into my third topic. changes in financial structure there has rightly been much emphasis on corporate sector finances, and government finances, in most of the industrial countries for many years. one or both of these areas have created big problems in just about every country at one time or another, and in a number of countries the struggle to get public finances in order is set to continue for some time ahead. but one of the most striking areas of financial change in recent times has been the increased opportunity for households to adjust their financial positions, certainly in the english speaking countries. access to credit has expanded remarkably over the past couple of decades. the structural decline in inflation has produced much lower nominal interest rates, and it is nominal rates which matter for households looking to borrow to finance a housing investment. at the same time, lenders find households less risky borrowers than companies. both these factors are encouraging households to take on more leverage. financial innovation also means there is much greater opportunity to collateralise assets. with the big run up in house prices which has occurred, there is a very large pool of potential collateral which has not as yet been tapped. and a fairly long period of relative economic stability - in australia ’ s case, a quite long expansion, now in its thirteenth year - has meant that people feel more comfortable with more leverage. in australia ’ s case, household gross assets are now about 8½ times current income, compared with about 5 times in 1980, and about 6 times as recently as the mid 1990s. financial assets have grown, but much of the increased wealth has been in the form of dwellings. since 1997, the australia - wide median price for an established house has doubled. at the same time australian households are more indeb

or by legal entity. banking organizations are doing so less and less, and as a result supervisors are following suit. banking organizations have increasingly centralized risk management at the parent as a necessity because the credit decisions cross legal entities and certainly cross instruments. the new technology has already created a supervisory imperative that financial modernization - - with its new permissible activities - - can only accelerate : the need to evaluate risk policies and positions centrally - most likely by one supervisor, sharing information with all legal entity regulators. but, i must say, it is not clear to me precisely what this technology implies for the legal entity regulators. if units of an organization, through combinations of puts and calls, can simulate all the attributes of a security, or even most of the risks and returns of certain businesses, what does the term “ functional regulator ” mean? historically, when a legal entity - - a unit of an organization - - was the only vehicle for participating in a certain function, the idea of separating regulators by functions was consistent with legal form. it is increasingly less so when a synthetic asset can be created with the same risk and return characteristics of the underlying asset. or, how comfortable should the individual regulator feel if a hedge involves as counterparties two legal entities in the same failing organization? will the regulator of unit a let the gains booked in his unit offset losses in unit b, regulated by another entity? can he do so under the law? if the answer to either question is no, what good is such a hedge at a failing organization? even without complicating the issue by failure, how does the regulator of the unit booking the loss on the hedge feel about the hedge, no matter how desirable the hedge is for the whole organization? the new reality, it seems to me, is that supervisors have to supervise risk and not instruments or entities. and that implies either that we keep organizations in old - fashioned straightjackets and permit no new activities - - a strategy which the market and technology has already undermined - - or we recognize that, over time, specialized regulators of banks, of securities firms, of even insurance companies - - are going to have to find a new paradigm. we are, i believe, groping toward that future supervisory structure. at its center will be an evaluation of risk management procedures and policies. historically, bank holding company supervision has dealt with an organization that was overwhelmingly a bank, and until section 20s, whose affiliates were engaged in businesses that could be conducted within the bank.