much better performance than that of virtually any other developed country ( the exception, as to so much else, is singapore ), but it is a markedly smaller contribution to national saving than the public sector was making in, say, 1995 / 96. in that year public sector saving amounted to 3. 7 per cent of gdp. so in the last couple of years the trend in public sector saving has been unhelpful in terms of the balance - of - payments deficit, a reflection of a strong increase in public sector spending over the last two years and a reduction in tax rates. one way of reducing the balance - of - payments deficit might be to increase the public sector surplus again, although nobody should under - estimate the difficulties of doing that in a country where pressure to increase government expenditure is relentless. new zealand ’ s record of household sector savings seems to have been relatively poor for many years. there have doubtless been many reasons for this. in the high inflation 1970s and early 1980s, when many interest rates were controlled at artificially low levels, the after - tax real return on savings invested in fixed interest securities was strongly negative, creating a strong disincentive to save. this situation changed markedly in the mid - 1980s, with positive after - tax real interest rates, but at about the same time financial sector liberalisation greatly increased the ability of many households to borrow ; this too almost certainly discouraged net saving. and of course for most of the last half century new zealanders have been encouraged to believe that the things for which people save up in many other countries - education, medical care, and retirement - would largely be taken care of by government. we were effectively told : you don ’ t need to save and, by the way, if you do, you ’ re a fool, because government - sourced inflation will steal a large chunk of what you save anyway. i ’ m frankly not sure how this culture of low household - sector saving can be changed. clearly there is a significant section of the community that has no surplus income at all. to suggest that a solo parent living on benefit has scope for increased saving is absurd, and would be presumptuous in the extreme coming from me. but it is also true that too many new zealanders on higher incomes still have attitudes to their personal finances that only made sense in the high inflation 1970s and early - 1980s. the mind - set was that only a fool had personal savings, and the quick and the clever were in

typical securitisation would involve, along the way, the creation and sale of derivatives based on the securitised exposures, further increasing the fee - earning potential of the underlying origination in an environment of voracious demand for risk. “ originate to distribute ” enabled a greater amount of credit creation to be supported by the same amount of financial system capital. it also made it harder for the institutions involved in the process of credit supply and derivative creation to assess their credit risk exposure and price it, because of the greater number of independent institutions involved, and the complexity of the transactions and instruments. the institutions involved came to depend on credit rating agencies for the apparently simple risk summary contained in a credit rating. in the event, the rapid growth and diversity of financial institutions and products ran well ahead of the ability of financial institutions to understand their risk positions, of rating agencies to translate the new exposures that were created, and of regulators to ensure that financial institutions were managing risk prudently. long - standing, well - conceived banking practices were abandoned as financial institutions focused on maximising short - term profitability. the mutually reinforcing strengths of real and financial demand showed up first in rising prices in the commodity and asset markets. as debt - funded consumption and investment in the developed world surged, generalised inflation pressure began rising. as suggested in figure 1, the first obvious signs of credit over - extension appeared in mid2007, as credit impairment on us subprime mortgage exposures began to surface. money market spreads rose quickly in the us and europe as frictions emerged in the cash markets. soon, the credit quality and liquidity of other types of asset - backed securities and derivative instruments became subject to doubt. the frictions spread further and markets in which risk is traded away became dysfunctional. financial institutions became increasingly unwilling to deal with each other as uncertainty about who was exposed, and how badly, became more and more enlarged. as 2008 progressed, it became obvious that the financial dysfunction was taking a lot longer to clear than expected. innovative products with strong credit ratings proved less than robust. unanticipated concentrations and correlations of risk were suddenly revealed – including within the largest global banks and credit insurers. the substantial increase in the diversity and sophistication of financial products and institutions turned out not to have reduced systemic risk through diversification. the fragmentation of risk had not enabled individual institutions efficiently to isolate, hedge and transfer risk. understanding of risk