of money had become stretched. all this looked sustainable so long as banks could continue to get access to cheap funds, and households and companies could rely on a steady stream of income and profit to service debt. but once the music stopped, those leveraged balance sheets were very vulnerable and adjusting them is proving very painful. that process is at the heart of the events unfolding here in the uk and around the world. but the crisis here was not triggered by rising household defaults or corporate failures in the uk ; in fact they have started to rise only recently. the crisis started in the us housing market and spread to the rest of the world through the banking system. and the problems in the us were themselves a reflection of global imbalances in trade and capital flows between advanced and emerging economies. the rapid growth of exports from asia, and latterly the gulf, was reflected in a substantial build up of savings which financed a rapid growth of credit in the west. when losses emerged in us sub - prime market, they ricocheted through the international financial system, including british banks. not only did they face losses on their portfolios of structured credit but sources of funding on which they had become dependent, particularly securitisation, dried up. a global economic slowdown initially, the impact of the crisis seemed to be concentrated in the us and a handful of european banks while the emerging economies of asia continued to boom. with wages and prices rising, many of the people i met in india and china this time last year rather welcomed the prospect of a fall in western demand as a means of taking a little of the heat out of their own economies. but the picture has changed since then. in the uk we have experienced a sharp and broad - based slowdown in activity that gathered momentum in the autumn ( chart 4 ). in part that reflected the concerted credit squeeze that started in summer 2007. but we also saw a sharp drop in confidence among consumers and companies after the crisis in the banking system which followed the decision to allow lehman brothers to fail in september last year. a similar drop in confidence has been observed across the world – in china and india as much as in the west – and we are now in the throes of a severe and coordinated contraction worldwide ( chart 5 ). even those countries which sat out the excesses of the credit boom have been affected by the slowdown. around the globe, sectors like manufacturing which are heavily dependent on world trade have been particularly badly hit

will take the decisions, all really appreciate the crucial importance of sustainable convergence to the success of the venture and that they do not see it just as a technical obstacle to their wider aspirations - i should like to think that. so, mr. chairman, some difficult decisions lie ahead. the period up to your next biennial dinner will be momentous. but that should not obscure the fact that our immediate economic prospects remain encouraging. i do not know of any serious economic forecaster who does not expect the economy to continue to grow over the next two year, or unemployment to continue to fall. the challenge is to ensure that we can still say that in two years ’ time.