- art capital equipment and the technology embodied in the existing stock of equipment remains across a broad set of industries. that gap implies continued incentives for capital investment. 3 although the exhaustion of technological possibilities seems unlikely to slow trend productivity growth, adverse changes in the economic, legal, and financial environment could threaten the longevity of the current productivity boom. for example, economists have long noted that free trade - and the specialization and economies of scale that it affords - fosters productivity increases. that our most recent productivity boom occurred against a backdrop of freer trade and increased globalization is likely no coincidence. however, the momentum for the liberalization of global trade now appears to be facing strong resistance. a halt in the movement toward freer trade or outright backsliding, such as the erection of new barriers to the trade of goods or services, would endanger the sustainability of the current productivity boom. some observers believe that security - enhancing limitations on the international flow of capital, labor, and goods in response to an increased terrorist threat could have similar effects. in addition, a failure to continue to vigorously address the corporate governance issues of the past few years could also threaten the current boom. as i noted earlier, the efficient channeling of capital to innovators has been a critical component of past productivity booms. fraud or dishonesty in corporate accounts increases investors ’ risk, raising the cost of capital and reducing incentives for investment. large government borrowing to fund current consumption could also raise the cost of capital and crowd out the investment on which the current boom depends. the magnitude of future government obligations to fund social security payments for the retiring baby - boom generation and the growing costs of providing medical care to the elderly add to the urgency to put government debt on a sustainable long - term path. doing so sooner rather than later would make the necessary adjustments easier and diminish the likelihood of significant future economic disruptions. some observers have also stressed the importance of large economic shocks, such as the oil price shock of the early 1970s, in bringing periods of rapid productivity growth to an end. it seems possible that the recent run - ups in energy prices, and the fact that markets expect much of them to be permanent, could reduce productivity growth by rendering energy - intensive technologies and capital obsolete. without dismissing such concerns, one needs to keep in mind that the recent shock to date has been significantly smaller than the oil shocks of the 1970s and that the economy today is far less energy intensive than it was then. additionally, one

that cannot be recouped from the failing firm itself. to avoid pro - cyclical effects, such assessments should be collected over time. establishing a resolution regime with these characteristics is, i would suggest, one of the most important financial regulatory reforms for every country that does not already have such a mechanism in place. it would lend substance to the idea that market discipline can be a solid third pillar of financial regulation, along with stronger prudential requirements and improved supervisory oversight. still, as is implicit in the foregoing discussion, an untested regime will probably not acquire complete credibility until it is actually applied successfully. for this reason, among others, it is important to ensure that other regulatory tools will help compensate for the uncertainties associated with an essentially untested mechanism. international efforts on resolution issues the looming or actual failure of a large, internationally active financial firm inevitably complicates the already challenging process of resolution. mismatches in the amounts and maturities of assets and liabilities held by the firm in the various countries in which it operates can lead host governments to take special action to protect the interests of depositors and creditors. and different insolvency regimes apply to separately incorporated subsidiaries across the world. some of those regimes may be substantively inconsistent with one another, or may not account for the special characteristics of a large international firm. a natural response, which one can find peppered through various law journals over the years, is to propose an international treaty that would establish and harmonize appropriate insolvency regimes throughout the world. just to state the proposition is to see the enormous hurdles to its realization. the task of harmonizing divergent legal regimes, and reconciling the principles underlying many of these regimes, would be challenge enough. but an effective international regime would also likely require agreement on how to share the losses and possible special assistance associated with a global firm ’ s insolvency. despite the good and thorough work being undertaken in both the basel committee on banking supervision ( basel committee ) and the financial stability board, we must acknowledge that satisfyingly clean and comprehensive solutions to the international difficulties occasioned by such insolvencies are not within sight. 2 it would certainly be useful if jurisdictions could at least broadly synchronize both standard bankruptcy and any special resolution procedures applicable to a failing financial firm. but even this significant advance would not settle many of the nettlesome problems raised by a cross - border insolvency. it thus