timothy f geithner : further investments to strengthen the financial system remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, before the economic club of washington, washington, 9 february 2005. * * * good evening. i am honored to be here. it ’ s good to be back in washington and to have a chance to talk with such a distinguished group. much of our nation ’ s financial history and the history of our central bank is a story of contest for influence and over ideas between political leaders in washington and the financial center of new york. i think it is important that ideas shuttle back and forth between our cities, and i am pleased to have a chance to share a few tonight. my overall argument this evening is this. we face a delicate balance between genuinely positive near - term economic conditions, and some fundamental challenges. if we are to increase the likelihood of continued strong growth in living standards, we should use this time of relative prosperity to address the imbalances that hang over our economy. even with good policy choices, and with considerable luck, these imbalances will take time to unwind. during this time we face some risk of a more volatile and less benign overall financial environment. this makes it important that we continue to invest in making our financial system stronger and more resilient. markets now reflect a fairly positive view about overall economic prospects. global growth is reasonably strong and broad - based. underlying inflation is low. estimates of structural productivity growth in the united states remain high. the global economy has weathered the oil price shock and other recent shocks quite well. most of the major emerging market economies look stronger than they have in some time. overall volatility in output and inflation has moderated significantly in the united states and, to a lesser extent, in other economies as well. these favorable fundamentals are reflected in low risk premia of many forms - low credit spreads, low and quite stable inflation expectations, and low actual and implied volatility. market participants appear to believe that future macroeconomic shocks will be more moderate, less frequent, and less damaging than past shocks have been. to say this another way, the price of insurance against a less benign world is now quite low. we face a number of significant challenges that threaten this positive outlook. i want to touch on the two that appear to me most important. the first is the growing imbalances at the center of the global economy. fiscal

considerable reassurance from apparent moderation in overall macroeconomic volatility recently, and from the ease with which our system has handled recent stress. prudent macroeconomic policy actions will increase the likelihood that these beneficial circumstances will continue. but we cannot know with confidence that the future will bring an enduring reduction in volatility and risk, and it would be imprudent to plan for such a world. all this suggests we should complement sensible macroeconomic policy choices with further investments to strengthen the financial system. let me end by thanking vernon jordan and the economic club of washington for providing a forum for thinking about the economic agenda of the country, and for giving me the opportunity to share a few thoughts with you tonight. thank you.