countries losing faith in open, market - based economic systems. it would be tragic if our failure to reform an unstable international capital market resulted in a return to inward - looking policies in the international trade in goods and services. and that may yet happen. one reaction to the instability of the international financial system would be for countries to unilaterally impose quite restrictive controls on inward and outward capital movements, and thus miss out on the benefits that access to foreign capital can provide. we have already seen this “ reforming the imf ”, foreign affairs, march / april 1998. starting, and it would be regrettable if it were to spread. even if this does not happen, there is still a possibility of other reactions which may be equally, or more, unhelpful to the world economy. in particular, i fear that a number of emerging market countries will take another form of safetyfirst policy by building up large international reserves - a new type of mercantilism. the problem with this solution is that to build up the reserves they would have to run current account surpluses for the foreseeable future. how will they do this? will they be tempted to restrict imports, subsidise exports or maintain undervalued exchange rates? all of these are what used to be called “ beggar thy neighbour ” policies. the whole world cannot do this, so who will run the corresponding current account deficits? the final irony, if this situation eventuates, would be that we would have an international system in which the poor countries lend to the rich so they can spend more than their income.

the annual growth in business credit exceeded 30 per cent for a time. the subsequent economic downturn saw many business failures, large losses by the banks and a prolonged period of deleveraging by business ( graph 6 ). graph 6 following that episode, it took almost four years for credit growth to return to a relatively normal rate. the next phase of credit growth was driven by the household sector. this began in the mid 1990s. up until then, australian households had relatively little debt by international standards, with debt outstanding equal to about 50 per cent of household disposable income. the fall in interest rates in the early 1990s, the switch in financial innovation from products directed to businesses to those directed to households and the general prosperity of the economy saw households substantially increase their debt over the subsequent 10 – 15 years, to about 1½ times income ( graph 7 ). this ratio is broadly in line with debt levels of households in other developed economies. graph 7 most of this increase in debt was for the purchase of housing, and was mirrored in a corresponding rise in house prices. since about 2005, the pace of growth of household credit has slowed, and on average has been broadly equal to the rate of growth of household income. as the bank has noted before, this is a reassuring development since continued increases in the gearing of the household sector would eventually have exposed the sector to substantial risk. growth in household credit continues to be moderate. over the past year or so, household credit has increased by around 7 per cent. most of this has been due to housing loans, while other forms of household debt, such as credit card debt, margin loans and personal loans have been relatively flat. all this is consistent with households taking a more cautious approach to their finances, as evidenced also by the increase in the household saving rate relative to that seen in the early and middle parts of the past decade. for households, therefore, the current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt. from the reserve bank ’ s perspective, this seems to be a satisfactory state of affairs. the third episode i want to talk about is the pick - up in business credit that began in 2005. this cycle was not as pronounced as that in the 1980s but, nonetheless, for a time business credit grew by about 20 per cent per year. part of this debt was to fund investment which, as you know, has been