of investment coming to australia from other parts of the world is channelled here via uk funds managers. the united kingdom accounts for 25 per cent of the outstanding value of foreign investment in australia. the united states is not far behind, at 24 per cent. in terms of the flow of new investment, the united states has been by far the largest source over the past decade. investment in australia by asian countries, whether measured in terms of the stock outstanding or the flow of new investment, remains small in comparison. japan is by far the largest asian investor in australia, with a share of 5 per cent ; other asian countries ’ investments in australia are noticeably smaller. if we look at australian investment overseas, the relationship is even more skewed to the united states ; over the past decade almost half of all the foreign investment by australians went to the united states. europe was the next largest destination for our savings, while the amounts going to asia were relatively small. as a broad summary, the conclusion i would draw from these figures is that while australia is very much linked into asia ( and particularly china ) in respect of trade flows, in terms of investment flows it is mainly linked to the united kingdom and the united states. 3. what does this mean for the australian economy and australian markets? let me start with financial markets. one does not have to follow financial markets too closely to know that developments in us financial markets have a big influence on our markets here in australia. the correlation between the australian and us stock markets, and between the australian and us bond markets, is very high. most mornings, one can get a pretty good idea of how the australian share market will open simply by looking at what happened to us share markets overnight. similarly, us news has an important influence on the australian dollar exchange rate and on the price of many of the resources that australia sells. it used to be the case that the us economy also had a big influence on australia ’ s real economy. for much of my working life at the reserve bank, if one was able to pick what was happening to the us economy, one had a pretty good indication of what was going to happen to the australian economy. correlations between australian and us gdp growth used to be very high. us news still dominates the daily flow of economic and financial information from overseas, and so still plays a dominant role in shaping perceptions about what is happening in the world economy. but the correlation between the united states and the australian economies has nonetheless declined

banks providing last resort support at low interest rates if required. she concludes that one of the main reasons why bagehot insisted on a imposing a high rate of interest was because england was operating under a gold standard at the time, and the bank of england therefore had to ration overall liquidity. with this not a concern in today ’ s world, martin argues that central banks should be able to provide last resort loans at relatively low interest rates if need be. assistance may, for example, involve the departure of the ceo, some other executives and some or all of the board, and losses for shareholders. apart from these issues, other potential complications can be noted. one is disclosure. in almost all circumstances, disclosure is highly desirable : an informed market is a fair and efficient one. but the communications surrounding emergency liquidity assistance are critical in determining the chances of success. it would appear that it was information that the bank of england was about to offer assistance to northern rock – which, objectively, should have strengthened its position compared with the alternative – that precipitated the queues in the streets. wholesale lenders to that institution would have already known that it was under pressure, but the news of official assistance told retail depositors, in effect, there was a problem and they reacted accordingly. the design of the uk deposit insurance system may also have been a contributor, in that less than full insurance and the possibility of a delay in receiving insured funds can add to the incentive for a run. in this complex situation, the uk authorities found it difficult to stabilise things, until the government issued a strong guarantee of northern rock ’ s obligations. a final issue is the re financing of the last resort loan in the private sector once the situation has stabilised. if there is ongoing general market turmoil, as in the case in question, then it can be difficult for a private firm to replace the public funding at a price that allows the bank in question to remain viable. in such an instance, the government faces the choice between providing the institution with longer term support – either a long term loan or taking ownership – subsidising a takeover or closing it. in the uk case, northern rock is being taken into public ownership for a time. in the us, the takeover of bear stearns – which, of course, is not strictly a bank – by jpmorgan chase is being assisted by a long term facility provided by the federal reserve, which carries some credit risk