is how to move from a cyclical recovery to a more balanced and sustainable pattern of growth globally. just as there are substantial fiscal imbalances in several countries that threaten to become unsustainable in the absence of consolidation, so there are large - scale imbalances in the world economy as a whole that raise issues of long - term sustainability. in particular, there continues to be a need to reduce consumption and increase saving relative to investment in the united states, and a parallel need to increase consumption relative to investment in parts of the emerging world. the recent crisis has reduced but not eliminated current account imbalances worldwide. in many cases, the imbalances remain sizable, and they could begin to grow again and ultimately become destabilizing. the case for global rebalancing is compelling when we consider the structural backdrop. if we in the united states and other deficit countries are to move to a more healthy balance of private and public spending in relation to income, other countries cannot be as reliant on us as in the past to be their growth engine. the recent configuration of global demand, after all, has involved persistent trade surpluses in many emerging markets and this represents foregone consumption and investment that has mostly been recycled into large scale accumulation of foreign exchange reserves. to be sure, the crisis demonstrated the value of an ample reserve cushion to protect against sharp shifts in capital flows. however, a number of countries have surely reached a point at which further reserve accumulation comes with more costs than benefits. the expected return on foreign exchange reserves is likely to be quite low in relation to potential domestic uses. in fact, there is the prospect that reserves could earn a significantly negative return in local currency terms, especially when the acquisition of such reserves is undertaken to resist local currency appreciation that must eventually occur anyway. finally, delay in adjustment of demand patterns and currencies raises the risk that these adjustments will ultimately occur in a more compressed and wrenching manner. how many times have we seen bottled - up pressures ultimately give way to disruptive overshooting? moreover, lack of progress on rebalancing demand would put at risk the open trading regime that has been so important to global prosperity and growth. to date, protectionist pressures have been largely contained. but if surplus countries are perceived as resisting global adjustment, the political consensus in favor of an open global trading regime could begin to erode. protectionism is a lose - lose proposition – for surplus and deficit countries alike

on the side of all ending up in a similar place, rather than on the relative degree of difficulty in getting there. the process is also fragile because some countries seem intent on strengthening their own set of standards before the international process has had a chance to reach consensus. although it is understandable that countries would want to move quickly to strengthen their regulatory regimes, such actions should not be undertaken in a way that is immutable and unresponsive to the emerging international consensus. 1 at the end of the day, to achieve harmonized standards, each sovereign nation is going to have to bend a little bit from what it believes is best for its financial system viewed in isolation. this is necessary, of course, because a series of regulatory regimes that appear best for each individual country would likely be distinctly second - best or even worse when considered collectively. the recent crisis underscores the fact that the regulatory regime needs to be harmonized and global in nature. my second concern on the regulatory reform front is that reform may be too focused on the traditional banking sector and not enough on other financial intermediation activities. of course, it is clear that we need to make the traditional banking system more resilient and robust. 2 but make no mistake, we also need to ensure that regulatory reform fully encompasses the full range of financial intermediation activity, including capital markets and insurance, over - the - counter ( otc ) trading of securities and derivatives, wholesale collateralized funding markets, and payments and settlements. this is necessary for two reasons. first, too much focus on raising the requirements on banks runs the risk of just forcing activity into the non - banking sector. second, many of the problems of the financial crisis originated outside of the banking sector. to a significant degree, the crisis was about regulatory gaps – be it gaps in terms of loosely regulated mortgage underwriting practices in the united states, the activities of bank - sponsored structured investment vehicles ( sivs ) and conduits, the providers of insurance guarantees against structured finance products such as aig financial products group, or the structured in this regard, i am considerably more worried about countries that implement standards that are more lax than the norm, rather than more tough than the norm. however, if many countries individually were to opt for tougher standards, this could raise questions about whether the international norm is too lax. work underway by the basel committee on banking supervision and others all are designed to make the traditional banking sector more robust. this