william c dudley : what does interconnectedness imply for macroeconomic and financial cooperation? remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the swiss national bank - international monetary fund conference, zurich, 8 may 2012. * * * it is a pleasure to have the opportunity to speak here today. as i see it, the complex interconnections that exist between the real and financial sectors of the economy, both within and between countries, have important implications for both macroeconomic and regulatory policy. in particular, cross - border coordination in both realms is warranted. often, macroeconomic and regulatory policies are too narrow in their focus. at times, policies are designed with the goal of being “ best ” at the national level. yet the resulting mix of national policies is distinctly inferior to what a well - coordinated global regime could have produced. today i will discuss two important challenges that go along with living in an interconnected world. the first is how to define what aspects of macroeconomic policy or regulation require greater international coordination and harmonization. some issues can be handled effectively at a national level, but the crisis has demonstrated clearly that many can not. the second challenge is how to make international coordination workable so that progress can be made in a timely manner while still preserving sufficient autonomy for countries to fashion policies to suit their particular idiosyncratic structures. as always, my remarks today reflect my own views and not necessarily those of the federal open market committee or the federal reserve system. we live in a globalized economy in which the flows of products, capital, and ideas across borders have led to significant economic gains for literally hundreds of millions of people around the world. thus, there is a strong public interest in ensuring that this global economic integration is supported by a coherent set of coordinated national macroeconomic policies and a harmonized international regulatory regime. this applies to the policy actions we undertake to reduce economic imbalances as well as to the regulations we develop to address the vulnerabilities in our financial system that were exposed by the crisis. the better we are able to develop cooperative global solutions to these types of issues, the more successful we will be in creating a sounder and more sustainable global economy and financial system. it is clear that there were important imbalances in both economic and financial activity in the years preceding the financial crisis. for example, in the u. s., too much of economic activity was based on an

complete. the news at the end of the day is good : it turns out that the alert was a false positive. but, the organization lost half a day of productive activity. in a simple world, controls detect problems immediately, diagnose with perfect accuracy, and result in corrective actions that are instantly and fully effective. in the real world, detection takes time, diagnosis is not always accurate, solutions take time to implement, and they don ’ t always work. that said, we must make decisions — including ones about whether and how to execute controls — based on the information available at the time. control design and execution take place in a world in which there is uncertainty about whether 3 / 5 bis central bankers'speeches there is a problem, what the problem is, what to do about it, when to do something, and what the effects of what we do will be. we can make better decisions when we understand and manage that uncertainty. there is also uncertainty about threats. we will never be able to envision the characteristics of all future causes of disruption. even when we plan effectively, we will be surprised again. and, like any other system, the control system will exhibit performance variability. for these reasons, we can ’ t rely solely on prevention. resilience requires the ability to withstand and recover when threats make it through preventive barriers, so a strong control system must incorporate preventive, detective, and corrective controls. perhaps because we are overoptimistic about prevention, detective and corrective controls sometimes get second - class billing. for many threats, time is not on our side ; the impact grows as the detection time increases. that ’ s the case with “ dwell time ” for cyber breaches, which is the amount of time attackers are on your network before you detect them. 9 it ’ s important to decide how long you are willing to wait to find out that you have a problem, and then use that as a requirement to design detective controls. underinvesting in corrective controls is problematic too. for example, how would you feel after a ransomware attack, if you find out that your backed - up data is intact but it will take months and millions of dollars to restore? or, if your first corrective action is the wrong solution and makes the problem worse? it takes time and resources to develop the tools, procedures, and skills to accurately diagnose causes, contain the immediate threat, and implement a long - term