to income, and perhaps look to save more of their current income than in the recent past. it is possible that we are witnessing the early part of a new phase where the household spending and borrowing dynamic is different from the past decade and a half. time will tell. but if that is the trend of the next several years, the growth opportunities for businesses and financial institutions will be different. and whereas the household balance sheet has been the big financial story of the past 15 years, some other financial trend will probably be the bigger story of the next decade. there are some developments that suggest the balance sheets of governments might well be expected to expand a good deal. the need for support of the finance sector in countries like the united states and the united kingdom is one. the build - up in public infrastructure in australian cities and regions may point in the same direction, though to a lesser extent. if the sudden aversion to these sorts of assets by private investors continues for any length of time, governments may have to choose whether to fund the projects themselves, or defer them. fortunately, public balance sheets in this country are in a very much stronger starting position than those in most other countries. financial stability and regulation all the issues surrounding the use, or not, of the government ’ s balance sheet to support the financial system have been on prominent display over recent months. we have seen the actions by the us treasury to take over the running of the two large entities known as “ fannie ” and “ freddie ”. as secretary paulson commented, the ambiguity about who was bearing risk in these entities has been a problem for a long time, and it needed to be resolved. the us government has shouldered the burden that investors always assumed it would, but has, quite appropriately, done so in a way that minimises the extent of bail - out for private shareholders who had been profiting from the risk - taking behaviour. facing up to these problems where the entities concerned were regarded as effectively guaranteed by the government was one thing. the question of support has also arisen for entities which have always been seen as purely private, and hitherto not, at least explicitly, regarded as so central to systemic stability that failure could be costly. the events of the past few days illustrate how difficult these issues have become. in all these cases though, in the final analysis there was not enough capital behind the risks that were being taken. the sophisticated financial system of the 21st century was supposed to spread risk

and, in particular, a lot more credit has been available, particularly over the period since the mid 1990s, to households. in recent years around the world, anyone who was creditworthy – and some who were not – have been able to access ample amounts of credit ; • the big decline in inflation. this lowered nominal interest rates dramatically. 2 this happened in all countries, though the timing differed. in australia it was a big factor after 1992 ; with the fall in nominal interest rates, a big front end loading problem in servicing the conventional mortgage was eliminated. see http : / / www. rba. gov. au / publicationsandresearch / bulletin / bu _ oct97 / bu _ 1097 _ 6. pdf. • a period of pretty low long - term interest rates globally, which encouraged borrowing around the world, though this was a bigger factor in the united states than here. this had a lot to do with the build - up of savings relative to investment in asia ; • a desire to devote a higher share of a rising income to acquiring housing services. as people ’ s income increases, certain goods and services will take a declining share of total spending – food, for example, or products, such as electrical goods or clothing, which have large falls in their relative prices over time. but other types of products take an increasing share of income. housing has tended to be in that category. as we have become wealthier, our aspirations for housing in terms of position, quality and size have naturally enough increased. but for various reasons the supply is not very elastic – there is only so much well - located land, and other factors have affected the supply price of dwellings more generally. in the end, a lot more of our income is devoted to housing, acquired by servicing mortgages, than was once the case. the question is whether this long period of gearing up by households might now be approaching an end. certainly household credit growth is much slower at present than it has been for some years, running roughly in line with income growth. might we see this conservative approach to debt among households persist? it is hard to know the answer to this question. there is much more of the household balance sheet that could, in principle, be turned into collateral, so gearing up might resume once the current turmoil has passed. but there is also a good chance that households will for some time seek to contain and consolidate their debt, grow their consumption spending at a pace closer