##turn as inventories adjusted in the opposite direction ; • an investment boom which uses up all the best investment opportunities and whose euphoria drives investment into marginally profitable projects ; • related to this, funding ( particularly equity finance ) which had been liberally given in the early phase of the cycle dries up as the financial sector comes to recognise the degree of overcommitment and attempts to compensate ( or over - compensate ) for this ; • asset prices, driven up by over - optimism about profit potential, spill over into investment decisions ; • households, buoyed by rising asset prices and the general euphoria, run down their savings, leaving them vulnerable to a sudden change in confidence. all this jerky dynamic seems very relevant to america, and inapplicable to australia. let's contrast the cyclical position in the two countries. first and foremost is the contrast between the share markets. with no nasdaq bubble, the australian equity market has continued to increase steadily throughout the period, and is currently still close to its peak, contrasting to, say, the wilshire which is nearly 30 per cent below. australia has no stories of 14 - year - old boy - millionaires who ramped their chosen shares via a chat - room canard : nor, more substantively, of entrepreneurs with backwards - facing baseball caps attracting serious funding on the promise of a rapid " cash - burn ". so we didn't get the same degree of distorted investment decisions and ephemeral wealth - driven consumption. business fixed investment expanded rapidly in america during the 1990s, to well above its historical average. investment in information technology and communications equipment surged, with capacity to produce this equipment expanding by 50 per cent in the past year alone. in contrast, in australia business investment has trended upwards during much of the 1990s, but in recent years has fallen back a little, to remain around its long - term average. there is in no sense a problem of over - investment. slow but steady wins the race. similarly, australian household saving has not followed the american example into negative territory. the us financial sector is showing all the signs of concern about rising risks and lowering profit expectations in the business sector. spreads between yields on us treasury securities and corporate bonds have widened noticeably. the data on ipos shows that it became increasingly difficult during the year to get these away. commercial banks became more cautious in their lending, particularly after the large amounts they had directed to telecom companies. by

markets - are the right ones. but the imf could, and should, be doing its job more effectively. the imf must evolve to take account of today's realities. essentially, change is needed in four areas. first, we must recognize that the fund has little direct ability to affect the policies of non - borrowing members. consequently, its ability to influence discussions of important global issues, such as external imbalances, hinges on the quality of its economic and financial surveillance, its advice, and its ability to communicate its message. the imf should focus its surveillance on systemic issues that can affect global financial stability - an area where the fund's particular expertise gives it a strong comparative advantage over other institutions. this surveillance must be seen to be independent of national authorities - and independent of the imf's lending activities. the fund's analytic and surveillance functions must be strengthened and must not be subservient to its lending function. second, in a world of freely flowing private capital, we must rely on market - based mechanisms to resolve financial crises, if and when they occur. while the fund has a continuing role to play in providing liquidity assistance to members in financial distress, there are limits to such assistance - the imf does not, cannot, and should not have endless reserves. third, to help guide market expectations regarding the scale of official assistance, we must be very clear that extraordinary fund lending is just that - extraordinary. if market players cannot judge whether or not the fund will intervene, and at what amount, they are unable to make appropriate credit decisions. without clarity on the rules governing access to fund resources, we leave ourselves open to delays in resolving crises and to moral hazard. these rules must also be as free as possible from political considerations and must allow funds to be used for liquidity assistance only. the provision of additional loans to insolvent countries helps neither the borrower nor other creditors. in this regard, the fund must improve its ability to distinguish between cases of illiquidity and insolvency. finally, and very importantly, the imf must be more effective in its role as a forum where global economic issues are discussed and solutions are found. the fund should be considered as the place where national authorities can gather around the same table for a frank exchange about policy issues common to all. the fund must be imbued with the same co - operative spirit seen at the oecd during the 1960s and 1970s as it helped