budget deficits to open up – this always happens when a decline in economic activity leads to a sharp drop in revenue and increased spending on the safety net – but instead is more due to the fact that these deficits generally have a very large structural component. by structural, i mean that the deficits are projected to be persistent – absent changes in tax and spending policies – even after the individual economies have recovered and the unemployment rates in these countries have fallen as low as is possible, consistent with price stability. fiscal stimulus measures undertaken to support demand have been responsible for much of the recent deterioration in the structural budget deficits. for example, in the united states, the congressional budget office estimates that the structural federal budget deficit rose by nearly $ 1 trillion between fiscal 2007 and fiscal 2009, to $ 1. 1 trillion or 7. 3 percent of potential gdp. obviously, different people have different views as to how much stimulus was needed and the form of that stimulus. but to me it is clear that an accommodative fiscal stance was the appropriate policy response given the circumstances. in the case of the united states, without substantial fiscal stimulus, the economy would have been even weaker and the unemployment rate considerably higher. given the fact that the federal funds rate could not be pushed any lower, fiscal stimulus was indeed important in stabilizing the economy. going forward, however, market participants are worried that many countries are now on unsustainable fiscal paths. by unsustainable, i mean a scenario in which persistently high deficits cause the amount of outstanding debt to rise relative to gdp indefinitely, even if the economy performs well in the future. the concern is that at some point, investors worried about the potential for default would balk, and this would lead to sharply higher interest rates and a fiscal crisis. just as there needs to be a credible exit strategy for monetary policy to anchor inflation expectations, there also needs to be a credible exit strategy from fiscal policy stimulus to anchor expectations about the risks of sovereign debt default. this is not going to be easy for several reasons. even abstracting from considerations involving political will – it is never easy to vote for higher taxes or lower spending – there is also the important issue of timing. the economic recovery is still very fragile. this means that premature fiscal retrenchment could jeopardize the recovery and push a convalescent economy into a double - dip recession. given this risk, why not just wait and see how things go

bank system, in part because they themselves had sponsored many of these off - balance - sheet vehicles. they had written very large contingent commitments to provide liquidity support to many of the funding vehicles that were under pressure. they had retained substantial economic exposure to the risk of a deterioration in house prices and to a broader economic downturn, and as a result, many suffered a sharp increase in their cost of borrowing. the funding and balance sheet pressures on banks were intensified by the rapid breakdown of securitization and structured finance markets. banks lost the capacity to move riskier assets off their balance sheets, at the same time they had to fund, or to prepare to fund, a range of contingent commitments over an uncertain time horizon. the combined effect of these factors was a financial system vulnerable to self - reinforcing asset price and credit cycles. the system appeared to be more stable across a broader range of circumstances and better able to withstand the effects of moderate stress, but it had become more vulnerable to more extreme events. and the change in the structure of the system made the crisis more difficult to manage with the traditional mix of instruments available to central banks and governments. first repair, then reform what should be done to reduce these vulnerabilities? our first and most immediate priority remains to help the economy and the financial system get through this crisis. a range of different measures of liquidity premia and credit risk premia have eased somewhat relative to the adverse peaks of mid - march. part of this improvement – this modest and tentative improvement – is the result of the range of policy actions by the federal reserve system, the u. s. treasury and other central banks. part is the consequence of the substantial adjustments already undertaken by financial institutions to reduce risk, raise capital and build liquidity. these actions by institutions and by the official sector have helped to reduce the risk of a deeper downturn in economic activity and of a systemic financial crisis. but the u. s. economy and economies worldwide are still in the process of adjusting to the aftermath of rapid asset price growth and unsustainably low risk premiums. this process will take time. as we continue to work with other central banks to ease the adjustment now under way in the u. s. economy and globally, we are working to make the financial system more resilient and to improve its capacity to deal with future crises. we are working closely with the securities and exchange commission ( sec ), with banking supervisors in the united states