funding vehicles with substantial liquidity risk. the deterioration in the u. s. housing market late in the summer of 2007 precipitated a sharp rise in uncertainty about the value of securitized or structured assets. demand for these assets contracted dramatically and the securitization market for mortgages and other credit assets stopped working. this, in turn, increased funding pressures for a diverse mix of financial institutions. uncertainty about the magnitude and the level of losses for financial institutions fueled concern about credit risk in exposure to those institutions. part of the dynamic at work was that banks were forced to provide financing for – or take over – the assets in a range of structured investment vehicles and conduits financed by asset - backed commercial paper. as some investors attempted to liquidate their holdings of these assets, many of the traditional providers of unsecured funding to banks pulled back from their counterparties in anticipation of the potential withdrawals of funds by their own investors. market participants ’ willingness to provide term funding even against high - quality collateral declined dramatically. as a consequence, the cost of unsecured term funding rose precipitously and the volume shrunk. banks were funding themselves at shorter and shorter maturities. as unsecured term funding markets deteriorated, the premium on liquid, marketable collateral – such as treasury securities – rose considerably. even with the dramatic actions by the federal reserve and other central banks to address these liquidity pressures, the strains in financial markets persisted. in many respects, conditions worsened materially in february and march. credit spreads on financial institutions widened, equity prices declined and market functioning deteriorated sharply. by the early part of march, the threat of a disorderly adjustment was growing. what we were observing in u. s. and global financial markets was similar to the classic pattern in financial crises. asset price declines – triggered by concern about the outlook for economic performance – led to a reduction in the willingness to bear risk and to margin calls. borrowers needed to sell assets to meet the calls ; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. this put downward pressure on asset prices and increased price volatility. dealers raised margins further to compensate for heightened volatility and reduced liquidity. this, in turn, put more pressure on other leveraged investors. a self - reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower

of gdp. as shown in ( figure 6 ), which shows these two components over time, the business balance is currently unusually high ; that is, businesses have very high cash flows relative to their investment outlays. this suggests that some of the required adjustment could occur by fostering greater investment spending as a share of gdp. for this to occur, it will be important that economic policies promote long - term growth and financial stability, and ensure that the united states is a competitive place to base production, with a well - functioning infrastructure, a skilled workforce and a reasonable tax and regulatory system. in addition, it seems desireable that some of the adjustment should take place in the trade sector. although a current account deficit of 3 percent of gdp by itself would be sustainable over time, for the household balance to remain close to current levels and the public balance to sharply narrow, then the current account may need to move further toward balance. for this to occur, there needs to be two offsetting adjustments. on one hand, the u. s. economy must be reoriented toward global demand and stronger net exports. on the other hand, there will have to be offsetting adjustments elsewhere in the world. after all, on a global basis, the current account balance – properly measured – must sum to zero. this means see " securing the recovery and building for the future. " remarks by william dudley at united states military academy at west point, new york, november 17, 2011, for a more detailed discussion of this issue. third quarter 2011, the latest period for which data are available. the federal public balance is roughly equivalent, though not identical, to the federal budget deficit ; the overall public balance numbers provided here include state and local government. bis central bankers ’ speeches that countries with significant trade surpluses will need to reorient their economies over time toward increasing domestic demand and running smaller trade surpluses. to sum up, the united states faces substantial fiscal challenges in the years ahead. and, in one important respect – net interest expense – these challenges may be more daunting than fully appreciated currently. in particular, the interest bill on the growing federal debt burden has been temporarily restrained by the low level of interest rates and high level of remittances from the federal reserve to the treasury. in addition, while significant fiscal adjustments must take place, it is important to recognize that such efforts will necessitate offsetting shifts in private domestic spending and production both here and abroad.