rate ), it mitigates the greater evil of those who have collateral to offer being denied credit altogether. this is certainly an issue we have to reflect on. flexibility and forgiveness when people complain about the high cost of credit to small businesses, they do not realise the biggest component of interest costs is the credit risk margin, not the real policy rate. the credit risk margin is not under the control of the central bank, it has to be brought down by focusing on improving the lending institutional infrastructure, as i have argued earlier. however, even though a system that allows for strong enforcement of repayment reduces the credit risk margin lenders charge, it also imposes larger costs on unfortunate borrowers. so, for example, should a student who chose the wrong college for studies and ended up having to pay back huge loans with only a mediocre job be penalised for life? we need a system that has some flexibility in repayment, so that those who make bad choices or have bad luck can get some relief. at the same time, they should not escape all responsibility, else we will see people borrowing excessively and misusing the proceeds, knowing they can get away scot free. keeping this in mind, our master circular on natural calamities allows banks to restructure agricultural loans without classifying them npa, provided there are widespread crop losses in the local area. this prevents individuals from exploiting the system, while giving collective relief when the area is hit. similarly, we have advocated that student loans be structured with an optional moratorium period, so that a borrower can survive periods of unemployment without being permanently labeled a defaulter. going forward, we should accept the possibility of individuals, including farmers, declaring bankruptcy and being relieved of their debts, provided this remedy is used sparingly, and the individual chooses bankruptcy as a last choice, knowing he will lose assets and be excluded from borrowing for a period. bis central bankers ’ speeches skilling and support there is a widely perpetuated myth that access to financial services is all that is necessary to set a poor farm worker on her way to riches. this is simply not true. clearly, access to institutional credit can help her pay back a money lender, and thus give her some relief. access to a bank account can allow her to put aside some savings, which protects them from the demands of needy relatives. but to generate income in a sustainable way, she needs help – in acquiring the skills necessary to

for what has been a relatively open trade policy. how effective we are in meeting this political challenge is likely to depend significantly on how effective we are in improving educational opportunity and achievement in the united states, and perhaps also in improving the design of the temporary assistance we provide those individuals who bear the brunt of the adjustment costs that come with greater global economic integration. these policies by the united states would help improve the prospects of a more benign adjustment process. but they would not be sufficient to produce a more favorable adjustment path. a more favorable adjustment scenario would require policy changes in each of the major economic areas. for global growth to be sustained at a reasonably strong pace during this period of adjustment, the desirable increase in u. s. savings, and the necessary slowing in u. s. domestic demand growth relative to growth of u. s. output, would have to be complemented by stronger domestic demand growth outside the united states, absorbing a larger share of national savings. exchange rate regimes, where they are currently closely tied to the dollar, will have to become more flexible, allowing exchange rates to adjust in response to changing fundamentals. reforms to financial systems and to social safety nets over time would help reduce the need for exceptionally high levels of domestic saving we see in many countries. the global nature of these requirements does not imply that the united states can put the principal burden for adjustment on others. if we focus adequate political capital on the factors within our control, we will have more credibility internationally in encouraging policy changes outside the united states that might reduce our collective risks in the adjustment process ahead. what does this mean for monetary policy? monetary policy itself cannot sensibly be directed at reducing imbalances, but the past and future evolution of global capital flows will of course matter for monetary policy by virtue of their impact on the outlook for output and inflation. for example, the forces that seem to be supporting an unusual level of capital flows into the united states may be materially dampening the level of forward nominal and real interest rates, and other things being equal, this would tend to produce higher levels of demand growth than would prevail in the absence of those factors. thus, the factors that have contributed to this pattern of external imbalances complicate the task of judging the appropriate stance of monetary policy in the united states today. perhaps it makes sense to conclude with the more general observation that changes in the size of global capital flows and the accompanying imbalances increase the importance of sustaining