william c dudley : lessons of the crisis – the implications for regulatory reform remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the partnership for new york city discussion, new york, 20 january 2010. * * * it is a pleasure to have the opportunity to speak here today. i will focus on the important lessons of the recent crisis and how those lessons should inform the regulatory reform effort. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee or the federal reserve system. in my opinion, this crisis demonstrated that a systemic risk oversight framework is needed to foster financial stability. the financial system is simply too complex for siloed regulators to see the entire field of play, to prevent the movement of financial activity to areas where there are regulatory gaps, and, when there are difficulties, to communicate and coordinate all responses in a timely and effective manner. effective systemic oversight requires two elements. first, the financial system needs to be evaluated in its entirety because, as we have seen, developments in one area can often have devastating consequences elsewhere. in particular, three broad areas of the financial system need to be continuously evaluated : large systemically important financial institutions, payments and settlement systems and the capital markets. the linkages between each must be understood and monitored on a real - time basis. second, effective systemic risk oversight will require a broad range of expertise. this requires the right people, with experience operating in all the important areas of the financial system. in this regard, i believe that the federal reserve has an essential role to play. the federal reserve has experience and expertise in all three areas – it now oversees most of the largest u. s. financial institutions ; it operates a major payments system and oversees several others ; and it operates in the capital markets every day in managing its own portfolio and as an agent conducting treasury securities auctions. also, as the central bank, it backstops the financial system in its lender - of - last - resort role. compared with where we were in late 2008 and early 2009, financial markets have stabilized, and the prospect of a collapse of the financial system and a second great depression now seems extremely remote. even with this progress, however, credit remains tight, especially for small businesses and households. economic growth has resumed, but unemployment has climbed to punishing levels. so while circumstances have improved, they are still very far from where we want them to

##s globally today ". and, in contrast to some of the other topics discussed at the hamburg summit, the g20 member states were unanimous in supporting the objective of inclusive growth. so what does inclusiveness mean with respect to growth? let ’ s start by breaking the term 1 / 3 bis central bankers'speeches “ inclusive growth ” down into its two components : “ inclusive ” means sharing the benefits of growth amongst all, and “ growth ” can be simply stated in economic terms as a long - term increase in real gdp. thus, we are talking about economic prosperity for the benefit of everyone. put this way, it becomes obvious that inclusive growth is not a recent invention but rather an economic goal that is just common sense. after all, back in 1957, ludwig erhard, the former german minister for economic affairs and later chancellor, entitled his book on the german social market economy " wohlstand fur alle ", which translates as “ prosperity for all ". although the invisible hand at work in a market economy leads to an efficient allocation of resources, it is now widely accepted that the market mechanism on its own creates winners and losers. while technological change generally leads to an increase in production capacities, it affects workers with different capabilities in different ways. obviously, a far - reaching redistribution would hamper incentives. excessive public expenditure — or speaking more generally – excessive redistribution through the tax system might harm the potential for sustained growth because entrepreneurs and workers become discouraged. on the other hand, " excessive inequality is not conducive to sustainable growth " either, as christine lagarde rightly stated. 1 excessive inequality can harm growth because it dampens the prospect for a significant part of the population of ever participating in the country ’ s prosperity. and so it is a matter of course that in most countries, the public sector shares in individuals ’ income to a certain degree by imposing taxes, with the majority of these countries imposing progressive taxes. this enables the public sector to supply public goods. achieving social cohesion by means of social security transfers, building human capital by subsidising education, and promoting the labour market participation of women, the long - term unemployed and lowskilled workers – all of these things can boost not only inclusion, but growth as well. bearing this in mind, it is important to find the right calibration of growth policies. the public debate on inclusive growth policies often takes the development of economic inequality over recent decades as a starting point. rising inequality is