efficient capital stock. the high productivity growth rate of the past decade does not suggest a problem. but our success in attracting savings from abroad may be masking the full effect of deficient domestic saving. * * * our day - by - day experiences with the effectiveness of flexible markets as they adjust to, and correct, imbalances can readily lead us to the conclusion that once markets are purged of rigidities, macroeconomic disturbances will become a historical relic. however, the penchant of humans for quirky, often irrational, behavior gets in the way of this conclusion. a discontinuity in valuation for statistical methodology see karen dynan, kathleen johnson, and karen pence, “ recent changes to a measure of u. s. household debt service, ” federal reserve bulletin, vol. 89 ( october 2003 ), pp. 417 - 26. judgments, often the cause or consequence of a building and bursting of a bubble, can occasionally destabilize even the most liquid and flexible of markets. i do not have much to add on this issue except to reiterate our need to better understand it. * * * the last three decades have witnessed a significant coalescing of economic policy philosophies. central planning has been judged as ineffective and is now generally avoided. market flexibility has become the focus, albeit often hesitant focus, of reform in most countries. all policymakers are struggling to understand global and technological changes that appear to have profoundly altered world economic developments. for most economic participants, these changes appear to have had positive effects on their economic well - being. but a significant minority, trapped on the adverse side of creative destruction, are suffering. this is an issue that needs to be addressed if globalization is to sustain the necessary public support. * * * the competitive state of banking, the subject of this conference, will be significantly affected by the path of global financial and technological innovations. in my judgment, this will be among the most significant developments affecting banking in the next decades.

their spending. to be sure, indexes of house prices based on repeat sales of existing homes have outstripped increases in rents, suggesting at least the possibility of price misalignment in some housing markets. a softening in housing markets would likely be one of many adjustments that would occur in the wake of an increase in interest rates. but a destabilizing contraction in nationwide house prices does not seem the most probable outcome. indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much. still, house prices, like those of many other assets, are difficult to predict, and movements in those prices can be of macroeconomic significance. moreover, because these transactions often involve considerable leverage, they need to be monitored by those responsible for fostering financial stability. there appears, at the moment, to be little concern about corporate financial imbalances. debt - to - equity ratios are well within historical ranges, and the recent prolonged period of low long - term interest rates has enabled corporations to fund short - term liabilities and stretch out bond maturities. even the relatively narrow spreads on below - investment - grade corporate debt appear to reflect low expected losses rather than an especially small aversion to risk. the resolution of our current account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our yawning fiscal deficit. our fiscal prospects are, in my judgment, a significant obstacle to long - term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances. one issue that concerns most analysts, especially in the context of a widening structural federal deficit, is inadequate national saving. fortunately, our meager domestic savings, and those attracted from abroad, are being very effectively invested in domestic capital assets. the efficiency of our capital stock thus has been an important offset to what, by any standard, has been an exceptionally low domestic saving rate in the united states. although saving is a necessary condition for financing the capital investment required to engender productivity, it is not a sufficient condition. the very high saving rates of the soviet union, of china, and of india in earlier decades, often did not foster significant productivity growth in those countries. saving squandered in financing inefficient technologies does not advance living standards. it is thus difficult to judge how significant a problem our relatively low gross domestic saving rate is to the future growth of an