an unrestricted access to foreign investors in various markets and instruments. 6. before addressing each of the above “ missing ” elements in our context, i would like to dwell a little on the conception of the “ complete markets ” and talk about a few accepted precepts related to financial markets that have been put to question post - crisis. in the last conference, i remarked that we would continue to learn from the lessons as the crisis was still evolving. as we are transiting from crisis to recovery, a few fundamental issues have become clearer. 7. the pursuit of complete markets, before the crisis, was axiomatically believed to be an unalloyed virtue and the policy and regulatory frameworks were expected to have this as an explicit policy objective. it had become the holy grail of market regulation and everything else followed from this fundamental truth. the gospel also became a convenient complement to the idea of free cross - border capital mobility, with the logical conclusion that free capital flows into the financial markets are necessary for efficient allocation of resources and for completion of markets by providing more liquidity. 8. technically speaking, a complete market is one in which the complete set of possible gambles on future states - of - the - world can be constructed with existing assets 1. in other words, a financial market place is said to be complete when a market exists with an equilibrium price for every asset in every possible state of the world. derivatives are expected to do precisely this, though subject to several simplistic assumptions. the conception of “ complete markets ” essentially entails freedom to the arbitrageurs to operate across cash and derivatives markets in each asset class to be able to enforce the equilibrium price. 9. so far so good. however, the critical part from a regulatory and systemic stability perspective is that sole pursuance of completion of markets may demand a certain kind of cash markets, which fit into the theoretical construct required for an efficient derivatives market. thus the regulatory framework for cash markets gets driven by the demands of the efficient derivatives market more than the underlying needs and systemic risk assessment. in a perfect case of tail wagging the dog, the elusive search for market completion and efficient derivatives markets drives the cash markets rather than the other way round. the risks induced by this process of backward re - engineering could be serious, particularly in case of key macroeconomic market variables such as interest rates and exchange rates. 10. the crisis has undoubtedly raised serious issues with regard to the above market philosophy,

number of subsidies have become embedded in our housing system, some policy reforms would have to be phased in gradually and after markets have recovered. a key point in reviewing u. s. housing finance policies should be to consider whether they encourage homeownership in a cost - effective manner without putting homeowners at unacceptably high financial risk. the 2005 president ’ s advisory panel on federal tax reform, for instance, concluded that the federal tax deduction for mortgage interest provided an “ incentive to take on more debt, ” involved large subsidies that encouraged “ overinvestment in housing ” and was “ not shared equally among all taxpayers, ” with higherincome households receiving “ a disproportionate benefit. ” accordingly, the panel recommended replacing the deductions with tax credits and placing a cap on the benefits as a means of distributing the benefits more evenly and limiting the incentives to take on excessive amounts of debt. with regard to promoting housing through interest rate policies, i have many times publicly expressed my views about the dangers of using monetary tools and the federal reserve ’ s balance sheet to pursue low interest rates and fund mortgage - backed securities. the only additional point that i would repeat is that for home financing to follow a path that is sustainable over time, the federal open market committee must begin taking steps to normalize monetary policy. conclusion economists hyman minsky, charles kindleberger, and, more recently, carmen reinhart and kenneth rogoff have all written extensively about how high credit growth and the financial imbalances that develop during economic upturns sow the seeds for future financial instability. in a similar manner, a norwegian economist looked at banking and financial crises in norway going all the way back to the early 1800s. she found that every major crisis was preceded by a rapid run - up in real housing prices. consequently, it is apparent that unsustainable trends in housing prices and home financing have been a major contributor to financial crises. the united states stands virtually alone in its use of gses and significant subsidies to promote homeownership. fannie mae, freddie mac and their political supporters have long attempted to justify this system by saying that “ american housing finance is the envy of the world. ” few would believe that today. it is time for a significant change. we must move toward a system with fewer subsidies and misdirected incentives. furthermore, to ensure accountability, any housing subsidies that we decide to keep should be made