such consequence, obviously, would be unnecessarily to crimp growth if the reforms are not well designed and / or implementation not well handled. another could be that very restrictive regulation on one part of the financial sector could easily result in some activities migrating to the unregulated or less regulated parts of the system. financiers will be very inventive in working out how to do this. if the general market conditions are conducive to risk taking and rising leverage ( which, sooner or later, they will be if the cost of short - term money remains at zero ), people will ultimately find a way to do it. of course while ever the unregulated or less - regulated entities could be allowed to fail without endangering the financial system or the economy, caveat emptor could apply and we could view this tendency simply as lessening any undue cost to the economy of stronger regulation of banks. but if such behaviour went on long enough, and the exposures in the unregulated sector grew large enough, policymakers could, at some point, once again face difficult choices. conclusion the financial turbulence we have lived through over recent years has had profound effects. the most dramatic ones in the short term have been all too apparent. but big events echo for many years. my argument today has been that the full ramifications are still in train, insofar as impacts on governments ’ finances, governments ’ role in the financial sector and the trend in regulation are concerned. it will be important, as these reverberations continue, for there to be a balanced approach blending strong commitment to sensible long - run principles with pragmatism in implementation. in australia we have been spared the worst impacts of serious economic recession in terms of lost jobs, much as we will be spared the prospect of higher taxes that face so many in the developed world. these are factors that support our native optimism, at least about economic conditions. nonetheless depression still ranks as a serious, and underestimated, problem in our community including among our young people. that is why the work of the anika foundation, working alongside other bodies seeking to combat depression, is so important, and why i thank you all very much for coming along today.

further assumed that a mechanical relationship between credit and gdp exists, which in turn results in big adverse impacts on gdp. to a fair extent these differences come down to a discussion about what economists would call elasticities : for the non - bank private sector to respond to a desire for banks to be funded differently, how big a change in the price is required – a little, or a lot? some of the industry estimates appear ( to me anyway ) to assume elasticity pessimism. official sector estimates are likely to be based on less pessimism. in truth, it is impossible to know for sure exactly how big these effects will be. that is a reason to proceed carefully, and to allow time for the new rules to be phased in. clearly, we wish the new rules to be constraining risk taking and leverage as the next boom approaches its peak, but that will probably be some years away, so we have time to implement strong standards and allow an appropriate period of transition. that said, there are three broad observations that i would like to offer. first, i think we ought to be wary of the assumption of a mechanical relationship between credit and gdp. of course a sudden serious impairment in lenders ’ ability to extend credit almost certainly amounts to a negative shock for growth in the short term. but did the steady rise in leverage over many years actually help growth by all that much? some would argue that its biggest effects were to help asset values rise, and to increase risk in the banking system, without doing all that much for growth and certainly not much for the sustainability of growth in major countries. some gradual decline in the ratio of credit to gdp over a number of years, relative to some ( unobservable ) baseline, without large scale losses in output may be difficult to achieve but i don ’ t think we should assume it is impossible. secondly, even accepting that there will probably be some effect of the reforms in lowering growth over some period of time, relative to baseline, we have to remember that there is a potential benefit on offer too : a global financial system that is more stable and therefore less likely to be a source of adverse shocks to the global economy in the future. so we have a cost - benefit calculation to make. quantifying all this is very difficult, but then that is often the case when deciding policies. thirdly, however, the reforms do need to be carefully calibrated with an eye to potential unintended consequences. one