found wanting, as the challenge of providing seamless service while integrating disparate back offices and branch networks proves to be beyond the skills of management. in other cases, the dynamics of newly acquired businesses prove unpredictable and leave even experienced managers explaining revenue shortfalls and earnings disappointments. as we know, markets can be unforgiving of such surprises, and boards of directors often follow the market signal and punish the top management thought to be responsible for failure. an obvious difficulty is the inability to predict which merger will be successful, with the winners not just cost - cutters but those who know how to develop new sources of revenue. while in general the early experience in large, cross - industry consolidation appears to be successful, we have not yet had the test of a slowing economy. until we have gone through a full business cycle, it is hard to know how strong the business case for integration truly is. second, we must be cautious in assuming that more diversified and larger firms are inherently less risky. one of the ongoing challenges in the emerging world of high tech finance is risk management. the experiences of the last 2. 5 years indicate that the speed of market movements, combined with the scale of financial endeavor, can lead to a rapid reversal of fortune for even the most sophisticated market participants. models are inherently backward - looking, and even the best of them have not proven to be foolproof in sounding the alarm for newer risks. there is evidence that banking organizations, and probably financial institutions more generally, will use the benefits gained from diversification to increase the risk in the individual components of their portfolios. indeed, some activities now permissible in financial organizations, such as merchant banking, have high average returns, but those returns mask a wide variance in result, with some outcomes quite detrimental to profits and potentially to organizational vitality. in practice, the results will differ from firm to firm, but appropriate disclosure and risk - management practices will become even more important. i am heartened, i might add, by what seems to be the fact that us bank risk - management skills paid large dividends - although clearly not avoiding all losses - in the asian financial crisis a couple of years back. a major reality of financial institutions is that their businesses are ultimately built on understanding and trust by both retail consumers and wholesale counterparties. the third, and most ephemeral, challenge is to build scale and complexity and still maintain understanding and trust while protecting proprietary information. the debate about privacy that accompanied the modernization discussion

. having said all that, however, my experience of observing the american economy day by day over the past half century suggests that most, perhaps substantially most, of the future can be expected to rest on a continuum from the past. human nature, as i indicated earlier, appears immutable over the generations and inextricably ties our future to our past. nonetheless, as i indicated earlier, i would not deny that there doubtless has been in recent years an underlying improvement in the functioning of america ’ s markets and in the pace of development of cutting edge technologies beyond previous expectations. most impressive is the marked increase in the effectiveness in the 1990s of our capital stock, that is, our productive facilities, the issue to which i alluded earlier. while gross investment has been high, it has been, in recent years, composed to a significant extent of short - lived assets that depreciate rapidly. thus, the growth of the net capital stock, despite its recent acceleration, remains well below the peak rates posted during the past half century. despite the broadening in recent decades of international capital flows, empirical evidence suggests that domestic investment still depends to a critical extent on domestic saving, especially at the margin. many have argued persuasively, myself included, that we save too little. the relatively low propensity to save on the part of the american public has put a large premium on the effective use of scarce capital, and on the winnowing out of the potentially least productive and, hence, the least profitable of investment opportunities. that is one of the reasons that our financial system, whose job it is to ensure the productive use of physical capital, has been such a crucial part of our overall economy, especially over the past two decades. it is the signals reflected in financial asset prices, interest rates, and risk spreads that have altered the structure of our output in recent decades towards a different view of what consumers judge as value. this has imparted a significant derived value to a financial system that can do that effectively and, despite recent retrenchments, to the stock market value of those individual institutions that make up that system. clearly, our high financial returns on investment are a symptom that our physical capital is being allocated to produce products and services that consumers particularly value. a machining facility that turns out an inferior product or a toll road that leads to nowhere will not find favor with the public, will earn subnormal or negative profits,