markets before legal confirmation illustrate the critical role of trust. even when followed to the letter, laws guide only a few of the day - to - day decisions required of business and financial managers. the rest are governed by whatever personal code of values that market participants bring to the table. commerce is inhibited if we cannot trust the reliability of counterparties ’ information and commitments. indeed, the willingness to rely on the word of a stranger is integral to any sophisticated economy. this necessary condition for commerce was particularly evident in freewheeling nineteenth - century america, where reputation and trust became valued assets. throughout much of that century, laissezfaire reigned in the united states as elsewhere, and caveat emptor was the prevailing prescription for guarding against wide - open trading practices. a reputation for honest dealing was thus particularly valued. even those inclined to be less than scrupulous in their private dealings had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business. to be sure, the history of world business is strewn with fisks, goulds, and numerous others treading on, or over, the edge of legality. but they were a distinct minority. if the situation had been otherwise, nineteenth - century market economies would never have achieved so high a standard of living. over the past half - century, societies have embraced the protections of the myriad initiatives that have partially substituted government financial guarantees and implied certifications of integrity for business reputation. as a consequence, the value of trust so prominent in the nineteenth century seemed by the 1990s to be less necessary. most analysts believe that the world is better off as a consequence of these governmental protections. but recent corporate scandals in the united states and elsewhere have clearly shown that the plethora of laws of the past century have not eliminated the less - savory side of human behavior. we should not be surprised then to see a re - emergence in recent years of the value placed by markets on trust and personal reputation in business practice. after the revelations of corporate malfeasance, the market punished the stock prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. there is no better antidote for business and financial transgression. corporate scandals and evidence of fraud and malfeasance notwithstanding, the history of ever - rising standards of living in a world fearful of violence is extraordinary testimony to the resilience of free peoples engaged in commerce. as president eisenhower opined

nations, most notably the united states and the united kingdom. estimates from the international monetary fund indicate that the group of the most advanced economies in the world swung from being net purchasers of foreign financial assets on the order of $ 80 billion in 1997 to being net sellers of domestic financial assets to foreigners of about $ 570 billion in 2006. 8 it is no accident that international excess capital flowed primarily to strong and stable economies and those with highly - developed financial markets. in a world of funds increasingly without borders, we would expect investors to seek out the best risk - adjusted returns. sound, transparent regulatory and legal frameworks in the united states, united kingdom, and some other advanced economies have helped contribute to the attractiveness of these markets. in addition, top - notch infrastructure allows for efficient clearance and settlement procedures for transactions in the most sophisticated financial markets, all of which promote investor confidence and continued sources of liquidity. implications for the economy and challenges for policymakers generally, high levels of liquidity offer substantial benefits to our financial system and overall economy through higher financial asset prices and a more efficient means to channel funds between savers and borrowers. strong liquidity may also help to prevent imbalances in certain markets from spreading because of the greater dispersion of risks. the u. s. economy continues to demonstrate extraordinary resilience, no doubt supported by the ability of financial markets to absorb substantial shocks. financial markets have been buffeted by a number of significant events, including a spate of corporate accounting scandals, the bond rating downgrades of ford motor co. and general motors corp. to speculative - grade status, the failure of refco, ( at the time the largest broker on the chicago mercantile exchange ), and the imposition ( and an empirical link, however, between financial market volatility and output and inflation volatility is less established. despite the very low levels of s & p 500 return volatility in recent months, the averages over longer periods have not changed much – volatility averaged close to 13 percent from 1985 to 2006 and between 1960 and 1984. one reason proposed for the lack of a direct relationship is that asset price volatility depends not only on the volatility of future cash flows but also the volatility of the discount rate that is applied to those cash flows, which does not appear to have declined in line with variation in forecasts of cash flows. ben s. bernanke, “ the global saving glu