That these events will affect the American financial system and our broader economy is not in doubt. The question is how large -- and long-lasting -- the impact will be. The passage of additional funding for the IMF is an important step toward containment and prevention -- and I am now very hopeful that we will finally see this achieved this week. But we have more to do to contain these problems and build a stronger global financial system for the next century.

I would like to spend most of my time today on the short and long-term imperatives we face in responding to these crises. But first, a word or two about some of the underlying causes.

I. Causes of the Crises

Like most financial problems, these difficulties have their roots in a combination of leverage and illiquidity. Absent borrowing on a substantial scale, the drying up of funds for borrowers is not a big problem. But equally, absent severe illiquidity, substantial borrowing is not a problem:

As several commentators have pointed out, financial historians would recognize in these problems the hallmarks of the traditional credit cycle. Exciting new investment opportunities beget credit expansion, beget excess borrowing, beget financial distress, and, ultimately, something approaching panic, as investors begin to think more and more about what other investors are thinking and less and about the underlying fundamentals.

So it is a classic credit cycle, but -- I would argue -- one with some late 20th century novelties:

II. The United States Approach

Our priority today is the same as it has been since the beginning of the crisis: to restore growth and confidence to the troubled economies and help prevent further contagion in international markets. As financial strains have increased so have we stepped up the pressure to forge a broad-based international response.

The core elements of a strategy for containing the immediate crisis are now broadly accepted among the G7 and were outlined by President Clinton in his remarks in New York last month and, most recently, during the Annual Meetings of the World Bank and International Monetary Fund in Washington last week. This strategy rests on three pillars.

1. Strengthened policies in the major industrial economies.

With inflation low or falling in most parts of the world, and the consequent shift in the balance of risk in the global economy, we are working with our G-7 partners in an enhanced emphasis on implementing policies to promote sustainable global growth:

2. Effective policies in the countries most affected.

While the external environment is important and international support can make a difference, countries shape their own economic destiny. And no amount of external support will save a country if governments lack the will to take the steps needed to revive confidence at home.

That means sound macroeconomic policies aimed at the fastest possible return of growth. That means strong structural reforms to scale back crony capitalism and support the operation of markets. And it means policies that increase political stability and build the government's domestic credibility.

A special priority in recent months -- and a focus of United States efforts within the international financial institutions -- is to find ways to accelerate the pace of comprehensive corporate and financial restructuring in countries where there is a systemic problem. This is particularly pressing in Asia where the severe indebtedness of both the financial and corporate system is a serious barrier to recovery and where addressing the overhang of domestic debt is essential.

To be sure, as countries choose their policies and the IMF makes judgments about what types of programs it is willing to support financially, difficult questions of balance have inevitably arisen. For example, programs must balance the need to stabilize exchange rates that are in free-fall against the risks of raising interest rates significantly at a time when the banking and broader financial system is seriously strained. And they have to balance the need to address the structural defects associated with crony capitalism against the need to avoid the danger that large-scale restructuring will generate a domestic backlash.

These questions will no doubt continue to be debated and there is no guarantee that the IMF will get it right on every occasion. But in debating the response to these crises it is vital not to confuse the doctor with the disease. The distress and difficult outcomes being seen in Asia are not a consequence of IMF policies or IMF finance. These are, rather, the attempts to palliate the true cause of the distress: the withdrawal of private capital and declines in domestic confidence that led to that withdrawal.

This crisis is still a moving story. But it is encouraging that in those countries that were first hit and where policy has been most determined there have been signs of containment. By contrast, in countries such as Indonesia and Russia, where governments did not carry through on their policy programs, inflation, interest rates and output losses are still rising and the return of confidence is more remote.

Countries that have consistently followed policies that the IMF were able to endorse and support -- specifically, the Philippines, Korea and Thailand -- have begun to see signs of a return to stability. In Korea and Thailand the currencies have broadly stabilized, nominal interest rates are now close to single digits, and real interest rates have fallen to well below pre-crisis levels.

For his part President Cardoso's recognition of the importance of strong Brazilian policies going forward has been appropriate and encouraging and the international community has made clear its preparedness to support Brazil going forward.

3. Conditioned International Support

International support, centered around the IMF, is vital because even strong domestic policies can fail where markets are in a tailspin and countries lack the financial breathing space to implement reform. Financial crises have elements of a self-fulfilling prophecy -- like bank runs, everyone expects failure or everyone expects everyone else to expect failure, leading to a rush to be the first one out and thus causing failure. Temporary, conditioned support gives countries a bridge to overcome this self-fulfilling prophecy and help restore stability.

Adequate funding for the IMF is critical to all of these efforts. The IMF operates much like an international credit union. We and other countries provide a line of credit, and when the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the IMF. That is why there are no direct budget costs. That is why our contribution does not increase the deficit, or impact other spending priorities.

The IMF's resources are today at historic lows. And for some months now measures that would secure additional funding have been awaiting Congressional approval. But I am very hopeful that in the coming few days this issue will finally be resolved in ways that carry forward the reforms that the United States has already achieved at the IMF -- reforms that have made it more accountable, more transparent, more closely focused on growth, and better-placed to respond appropriately to new-style financial crises that begin in the capital account not the trade balance.

Going forward, we need to build on this new funding for the IMF to work to reinforce the capacity of the international community to provide financing to countries that are pursuing sound policies and are nonetheless affected by contagion. Where contagion is a serious concern the emphasis must be on finding new ways to make liquidity available and restore confidence which do not raise undue moral hazard effects.

We will also be working with the Multilateral Development Banks to provide substantially increased funding for social safety nets in the countries in crisis to help the least advantaged citizens in those countries who are experiencing hardship. As the President said recently, if we want these countries to do tough things, we have to protect the most defenseless people in the society and we have to protect people who get hurt when they didn't do anything wrong.

III. The Longer Term Challenge

The fires are still burning and the risks remain very real. But in the drive to forge an immediate response to these events we cannot afford to forget the longer term challenge they pose.

I am convinced that any effort to close down the global capital market in response to these events would make it worse rather than better. I am equally convinced that openness offers the surest route to increasing opportunity and prosperity around the world. But to say this is not to say that we must be happy with the global capital market we have now.

When the actions taken by one company or group of investors can mean that one day a worker on the other side of the world is going about his business, the next he has been thrown out of work, the price of his daily bread has tripled and his children are not in school but on the street -- when we are seeing scenes like these every day in the world in which we live, it is fairly clear that something has to give.

We have seen too many financial crises in these last years of the century, crises that have come at unacceptable costs for the people in the countries affected by them. Quite simply, if we do not find a way to do it better we will not in the next century have the truly global financial system in which we all have such an enormous stake.

To be sure, we don't yet have all the answers and some of those we do have continue to be a subject for debate. But there is now a broad consensus on three of the most important areas for reform. These were highlighted in concrete proposals put forward last week by international working groups involving finance ministries and central banks from key industrial and emerging nations that were established under President Clinton's leadership earlier this year:

Going forward, we need to find new ways to deal effectively with the emergencies we have seen in recent months and the contagion that these can cause. We need to strengthen governments' capacity to opt for cooperation over costly, often counterproductive, unilateralism. And we must find ways to restore confidence and overcome collective action problems at the times when it is no one's interests to be last in the room -- but no one's interest to be crushed in a stampede out.

The problems we have seen in financial systems in the United States and other industrial economies over the years speak to the difficulty of addressing these issues effectively. And I don't need to remind this audience of the difficulties involved in making legal and regulatory reforms translate into improved behavior and making new institutions come to life. Due diligence is one thing. True diligence quite another. And when times are good it can be a brave financial officer who forces the chairman to look at the small print.

And yet, if these crises are a reminder of the challenge that these issues present, to industrial nations as well as emerging ones, they are no less a reminder of the critical importance of resolving them if we are to build the strong and stable, truly global economy in which we all have such an enormous stake. Supporting globalization and the benefits it offers is important. But it is not enough. If the global economy is to continue to grow and to realize its true potential we need to lay it on more stable foundations. And most critically, we need to make sure that it serves all of its members. Thank you.