must come from the people themselves. in this process, the government can only play an encouraging and facilitating role. the additional challenge for us is that this time, the motivation for remaking ourselves is less obvious. previously we were catching up from behind, but now we are at developed country standards of living. why do we need to sacrifice what we already enjoy? yet if we do not accept the sacrifices and change, not only will we not make progress, but we will even likely lose what we already have. no union leader who has visited shanghai doubts this. it is the reality that we must get home to every singaporean. social consensus and political will fourth, reform and restructuring is never a purely economic exercise. success depends critically on social and political factors. economic reforms are not painless. there will be winners and losers, at least in the short - term. therefore there must be political support for the changes, a willingness to accept the pain of the transition, and a confidence that those adversely affected will be helped. this depends on a feeling of shared nationhood, of going through thick and thin together. to maintain the social compact, a balance needs to be struck between pushing through needed changes without delay, and spacing them out to reduce the political pain. thus the meiji reformers'slogan was fukoku kyohei, meaning " rich country, strong military ". their objective was not just better lives for individual japanese, but a strong japan taking its rightful place among the nations of the world. this assertion of japan's role in world affairs led to the pacific war. margaret thatcher believed in a strong britain too, but hers was a very different model. she famously declared that " there is no such thing as society ", only individuals, and that people must look to themselves rather than the government. but she went too far down this path. when she persisted in implementing the poll tax in 1990, the people revolted, and even her own party turned against her. the iron lady was out. in singapore, consensus building is especially important as the remaking is to lead to an economy more reliant on private enterprise and individual effort. this can only work if singaporeans feel that the system is fair to all, and benefits everybody over the long run. hence we have worked hard to strengthen the social and political consensus in support of our remaking plans. we involved and consulted singaporeans as widely as possible. we worked in partnership with both the employers and

always reflect genuine information ”. it is this misguided belief that prices always reflect fundamentals, that leads to asset bubbles. government regulation is therefore imperative. effective regulation and supervision of the financial sector is necessary to promote prudent behaviour and sound risk management and minimise the risk of financial shocks. 9. but we should guard against drawing the wrong lesson from the crisis : it is not about more regulation and less markets. the new financial landscape paradoxically requires both – better regulation but also better functioning markets. bis central bankers ’ speeches 10. market competition remains the best way to promote innovation and create prosperity. regulation must not stifle markets but seek to make them work better. in the financial sector, this means a judicious mix of rules and incentives for stronger capitalisation, more effective risk management, better transparency, and sharper market discipline. this has been central to the approach taken by the monetary authority of singapore – never hesitating to impose high standards of prudence and financial discipline but always careful to do so in a manner that does not undermine enterprise and innovation. 11. financial innovation – especially in derivative products – has been blamed as a cause of the crisis. this is not quite correct. innovation has been a feature of finance for decades. the crisis was caused fundamentally by failures in macroeconomic policies and financial supervision. monetary policy was too easy for too long in too many countries. this led to low interest rates and lax lending standards that precipitated unsustainable housing booms, mainly in the united states but also in other countries. financial supervision failed to detect and correct the build - up of leverage in the system, especially in the shadow banking sector. complex financial products obscured the risks in sub - prime lending and transmitted these risks across the financial sector. as edwin truman from the petersen institute puts it, “ financial engineering contributed to the market dynamics once the crisis got underway, but it was not ‘ the cause ’ of the crisis. ” 12. regulation should therefore not restrict financial innovation but seek to create conditions in the market that promote effective risk management. regulation and markets need to work hand in hand. take the example of securitisation, which has been much maligned since the crisis. let ’ s look at the good, the bad, and the ugly of securitisation. the good is that securitisation is a useful means of mitigating and diversifying credit risk through capital market intermediation. the bad