out in the maastricht rules. we are in the midst of a very complex situation, and like i said before, we must build up reserves in various areas, and among other things, we must make sure that we can raise money in the markets if it becomes necessary. when the global crisis broke out, the australian government was able to allow itself to spend immense sums because its debt burden before the crisis was very low. if we enter a recession, the debt - to - gdp ratio will jump, and we will find ourselves in a situation where the government cannot finance the deficit at a reasonable rate of interest, like the situation in 2003. we must be in a situation where we can deal with various problems, even if we don ’ t know whether those problems will actually take place. bis central bankers ’ speeches if we must increase defense expenditures because it is vital to the future of the country, as some people claim, we will need to pay for it, through an increase in taxes. i don ’ t understand those who say, for instance, that “ we have needs in education, so we must increase the deficit. ” if we have such needs, then we must finance them, mainly through taxes. i don ’ t think that the defense budget can continue increasing at the rate it has for the past few years. which brings me back to what i said about the importance of a peace agreement. when people say that there is no partner for a peace agreement, that is always true : you need two to tango, and it is very important to start this tango. regarding monetary policy, the interest rate is a tool that affects the entire economy. we cannot use the interest rate in order to solve the housing problem. we must obviously take the problems in housing into account. but if there are problems in a certain area, and the central bank ’ s tools are not sufficient to handle these problems, someone else has to deal with it. in such a case, we are talking about increasing supply, which is currently in the realm of responsibility of the israel lands administration and planning authorities. we have tried various foreign exchange regimes over the years. my experience shows that, regardless of the exchange rate regime we are in, there will always be times when we will want to have other regimes and systems. however, experience shows that it is always correct to allow the exchange rate to change based on market forces. everyone is impressed by the success of the swiss in strengthening the exchange rate and preventing

asia at this time have been in a better position to weather the first round impact of the turmoil, both the direct impact on banks and the impact on financial markets from de - leveraging and capital flow reversals, is a clear testimony to the importance of this second role. for emerging markets, both these roles are powerful, and they put the financial sector at the center of any efforts to ensure economic and financial stability in the long run. the third observation is that the turmoil shows that the risk of systemic instability can be greater with financial globalization, and this raises an important question about the appropriate monetary policy framework for maintaining macroeconomic stability. for central banks, price stability remains the first and foremost objective of monetary policy. but in the context of today ’ s financial globalization when the source of systemic danger is clearly external, the idea that price stability in itself might not be enough to ensure macroeconomic stability is now gaining more acceptance. one approach to deal with this is to combine conventional monetary policy framework like inflation targeting with a macroprudential framework. the latter is aimed at addressing the risk to financial stability by implementing measures to counter excessive lending or the procyclical nature of the financial system. this is the approach that we have taken at the bank of thailand, and i will speak more on this later. so, the current turmoil is a reminder of things that can go wrong with financial globalization, and the three observations i cited point to the key challenge faced by policy makers in emerging markets. in this context and in relation to the financial sector, the challenge for policy is three - fold. the first is how to ensure that we have a strong and resilient financial sector with disciplined risk management so that it can help mitigate the risk of major imbalances in the economy. the second is how to reduce the procyclicality of the financial sector so that the risk of a credit - driven bubble can be avoided, especially at the time of strong and persistent capital inflows. and the third is how to develop a deep and liquid financial market that can help improve the ability of the economy to adjust to shocks. in the context of financial regulation in emerging markets where the dominant part of the system is typically the banking sector, the challenge for policy is to calibrate a regulatory policy that fosters a strong and resilient banking sector with good and disciplined risk management, that makes use of the necessary macroprudential measures when needed to help reduce or counter the pro