It is a pleasure to speak with you today and I would like to thank Governor Hunt and Erskine Bowles for the invitation. North Carolina has made many important contributions to our nation's well being since the founding of the Republic, and I think it would be fair to say that sending Erskine to Washington to serve as the President's Chief of Staff is certainly one of them. He was centrally involved in accomplishments of great importance, without developing any sense of self-importance; that is a not inconsiderable achievement in any place, and certainly in Washington.

This morning I would like to make a few observations about the dramatic transformation of the global financial markets and global economy over the last couple of decades, the opportunities and risks that this has created including the global financial crisis of the last year and a half, and how we can best position our country to succeed economically in the new century.

As many of you may know, I worked on Wall Street for 26 years, before joining the Clinton Administration six years ago. In those 32 years I have participated, as have many of you, in remarkable changes in our economy and in the global economy and global financial markets -- changes that could sensibly, and without hyperbole, be called revolutionary. For example, when I first started on Wall Street accounts were still kept by ledger, and I used a slide rule to calculate yields. And I remember one instance early on when an institutional client asked what stocks we were recommending. We sent him our research reports, and a year later he came back and said that he liked one of our recommendations and would buy some. Today, a recommendation that is a few days old may be considered stale, and day traders who hold a stock overnight consider that long term. These are just a few examples of how dramatically different the financial and economic worlds are today.

What I would like to do now is take a somewhat closer look at four of the fundamental changes that have occurred: globalization; financial innovation; advances in technology; and the place of developing nations in the global economy.

First is globalization. Financial markets now function in many ways as one integral whole covering the globe, with large volumes trading across borders, with large numbers of securities of many different nations trading in each major market center, and with events in one market affecting other markets around the world almost instantly. When I started on Wall Street, if a company wanted to raise debt or equity, it would look only at the possibilities in the U.S. markets. But, by the mid 1980s, that same company would look at the possibilities in capital markets all over the world, and then issue in whatever market centers the opportunities were most cost effective. Similarly, two or three decades ago, U.S. investors invested almost entirely in U.S. securities, and U.S. banks and other creditors extended credit predominately to American entities and a relatively small number of foreign countries and foreign private sector borrowers. Today, both investors and creditors are involved in a vast number of countries, including many developing countries around the globe.

The second major change has been financial innovation. Thirty years ago, a portfolio consisted of stocks and bonds. Today, investors can buy securities with virtually any desired combination of debt, equity, commodity, or foreign exchange futures, from floating rate bonds in any major currency to options on futures in debt or equity, currency swaps, income warrants or oil futures denominated in the currency of choice. Financial innovation has meant greater efficiency and precision in serving the purposes of providers and users of capital, but has also created new risks and new challenges, which I will return to in a moment.

The third change has been the great advances in technology without which today's globalization and financial innovation could not have occurred. Technological development has led to instantaneous information sharing and instantaneous trading between market centers all over the world. And technology has provided the calculation power necessary to create and trade complicated derivatives. I might add that this impact on financial markets is just one aspect of the much broader effect of technological development on productivity throughout our economy, and one of the great debates now raging is whether the technological development of the information age has significantly increased the basic rate of productivity growth of the American economy. I will not be addressing this issue this morning, but the answer either way could profoundly affect our economic future.

The fourth change that I will focus on is the place of developing countries in the global economy. When I started on Wall Street, developing countries were economically irrelevant, except as sources of raw materials and recipients of foreign aid. They certainly were totally off the radar screen of the financial markets, except for limited bank lending, mostly to sovereign borrowers. In recent years, developing countries have been major markets for the United States, buying roughly 40% of our exports, and have become the recipients of large investment and credit flows. Twenty years ago, virtually no one in the United States had ever heard of the Thai baht or, for that matter, the Korean won. Starting about a year and a half ago, they were on the front pages of daily newspapers with some frequency, and events in Thailand and Korea affected countries around the world, including our own, and during the last week of 1997, events in Korea, posed a real threat to the global system.

All of these changes have created great opportunities for our country and for many around the globe, including in the developing world. Even taking into account the global financial crisis of the last year and a half, emerging markets around the world attracted vast amounts of private capital over the last twenty-five years, fueling investment that helped lift millions out of poverty.

However, just as these changes created great opportunities, so too have they created significant risks and challenges. Let me say a few words about four in particular.

First are the questions of portfolio risk and what is often referred to as systemic risk. Let me start with portfolio risk. The changes I just described have led to enormous complications with respect to risk management. One of the great challenges for any financial institution is the fact that risk management models -- no matter how sophisticated -- cannot capture the full complexities of the real world and its uncertainties. Consequently, it is impossible for even the most sophisticated institutional investors to fully understand, measure and judge the risks of a complex portfolio, which many of them have these days. The collapse of the hedge fund, LTCM, is a recent example of this. And once you go beyond the most sophisticated organizations, understanding of these risks -- for example, of embedded options and possible unexpected noncorrelating moves in derivative portfolios -- probably diminishes quite considerably.

Systemic risk from problems in one large institution or one country -- that is, risk of broad contagion or spreading effects elsewhere in the global economy -- has increased greatly as a result of all the changes that I have just discussed. And that is precisely why we at the Treasury, working with the Federal Reserve Board and our counterparts around the world, have been so intensely focused in the last few years -- but especially in the last year and a half -- on reforming the architecture or framework of the global financial markets.

Our goal has been clear: to have a system less prone to financial crisis, and better able to manage a crisis when one occurs. Our efforts have included: first, ways to induce structural reform and sound macroeconomic policy in developing countries; second, ways to reduce excessive investment, excessive credit from industrial country banks and investors due to inadequate focus on risk during good times, which was a major cause of the crisis of the last year and a half; third, greater disclosure and transparency; fourth, appropriate private sector burden sharing in crisis response; and fifth, greater support in crisis countries for those most in need.

We are making concrete progress in each of these areas, but the issues are extremely complex, both practically and analytically, often involving powerful competing considerations. For example, private sector creditors should bear the consequences of their decisions in a market-based system when there is a crisis, and that is the principle lying behind private sector burden sharing. On the other hand, borrowers should be held accountable to pay their debts or bear heavy consequences, otherwise no one will extend credit. The challenge is to find an approach that best combines these two competing principles, and I think we have begun to do that in the handling of actual situations.

Beyond the complexities, there is also the need to develop international consensus, and that is no simple matter. Thus, change to the system, which has started, will happen in pieces over time, rather than in one dramatic moment. In my view, however, the effects will be substantial.

Let me also say that there are a whole host of proposals out there that on the surface seem sensible and have great political appeal, but which, when carefully analyzed, are deeply flawed. It is easy to make dramatic statements; it takes a lot of hard work to produce sensible proposals. We have a two part focus: one, developing and putting in place those reforms that are sensible; and two, preventing measures that do not make sense.

The second challenge -- which is related to the contagion issue I just discussed -- is the greatly increased speed with which problems can now spread. Last August, Russia defaulted on its debt and the ruble collapsed. Almost instantaneously, markets around the world were sharply affected, due to instant transmission of information, instant global trading capability, and global portfolio diversification. More generally, the turmoil in markets affected by a shock can quickly create instability in markets that are totally unaffected by that shock, if for example, investors decide to seek liquidity where they can find it or develop a herd mentality, as in a sudden aversion to developing countries or a sudden aversion to risk. The increased speed of interaction greatly increases the risk of contagion, because it increases the potential for acting in the heat of the moment or simply for getting out of harms way until there is time to sort matters out, and reduces the potential for considered judgment of all the relevant information before acting.

The third challenge is to continue dealing with the financial crisis that first erupted in Thailand close to two years ago, and is still significantly affecting almost all countries around the world, including our own.

This crisis did not start in Thailand, as often portrayed, but, in my view, was a product of problems that had developed over many years. In developing countries, those problems included weak financial systems, various other structural weaknesses, and a variety of combinations of unsound fiscal, monetary, exchange rate, and debt management policies. In industrial countries, the problems included -- as I mentioned earlier in discussing financial architecture -- large excesses in capital flows into developing countries due to a failure to fully analyze and weigh risk in decision making when times were good. That, I might add, is not unusual in markets. When the crisis first hit Korea, I remember a call to a bank that had substantial credit exposure in Korea, to get some additional information for our own work, and I was astounded at how little they knew about a country to which they had extended so much credit.

The work of the international community in response to the crisis has been centered around the IMF, a critically important but relatively unknown institution until the last couple of years. In my view, the IMF has on balance made sensible judgements in structuring and providing its loan support programs to countries in crisis, in the face of unprecedented and highly complex circumstances. And the IMF has been flexible in adjusting those judgements when circumstances warranted. However, in the final analysis, these programs for recovery from crisis can only work, when the country involved takes ownership of reform and implements reform on a consistent basis through the inevitably difficult process of recovery.

Thus, in Korea, where the government did exactly that, foreign exchange reserves have increased from 4 billion in December 1997, when the peak of the Korean crisis posed real threat of an enormously heightened world-wide impact, to 53 billion now; and overnight call rates have fallen from 35% to 5% on Korean short-term government securities. In both Korea and Thailand, much has been accomplished, though much certainly remains to be done. In Russia, where the government did not proceed with reform, economic conditions have deteriorated substantially.

Looking forward, on the one hand, there has been real progress in dealing with the crisis -- though substantial uncertainties and much work lies ahead -- on the other hand, partly due to the crisis and partly for other reasons, the global economy aside from the United States is generally viewed by private sector forecasters as looking soft. Japan, despite some important steps, still faces great challenges and is generally thought likely to have negative to zero growth this year; Western Europe has seen private sector growth forecasts declining to relatively low levels, and Latin America is experiencing negative growth in Brazil and Argentina. Our own economy is the one major bright spot, and looks very likely to have solid growth and low inflation in the time ahead, although some sectors clearly have been badly affected by reduced exports or increased imports due to the crisis, and we are subject to being affected overall by problems elsewhere in the global economy.

Fourth, and finally, we must continue in our own country, in both the private sector and the public sector, to continue on the tracks that have contributed so much to the healthy economic conditions of the past six years. In the private sector, that means continuing to effectively focus on the increased productivity and competitiveness that has brought our private sector back over the past ten to fifteen years from a position of global laggard to a position of great competitive leadership. In the public sector, that means: continuing on the path of fiscal responsibility, investing in our people to promote future productivity through education, healthcare, real economic opportunity for the residents of our inner cities and other distressed areas, and the like; and leadership on the issues of the global economy that so much affect our economic well being, such as responding to the current crisis, reforming the architecture of the global financial markets, and maintaining our own open trading markets while working to open markets aboard.

Let me expand for a few moments on two of these areas.

As to fiscal responsibility, with our current surplus and with surpluses projected for a long time to come, we have an historic opportunity to increase national savings, and that is what the President has proposed to use roughly 77% of the surplus to pay down the publicly held debt of the Federal government, to strengthen the Social Security and Medicare Trust Funds, and to promote private savings through a tax cut incentive to save.

Using the surplus for a large tax cut or fiscal spending might be more popular, but promoting fiscal responsibility and national savings is the right path for our future.

As to open markets, there is no doubt in my mind that our open markets have contributed greatly to the healthy economic conditions of the past six years, through lower prices for both consumers and producers, increased competitiveness and therefore increased productivity, and for all these reasons lower inflation and lower interest rates.

It is worth noting that Continental Europe, with its less open markets, has persistent 10-12% unemployment, and virtually no new job creation, and the United States, with its relatively open markets, has 4.3% unemployment and six years of vigorous job creation.

Moreover, restricting access to our markets now, would hamper the recovery in crisis countries that are so important to our own economic well being, and could strengthen the voices of protectionism in industrial and developing countries around the world, which in turn could severely effect our export industries.

Having said that, one consequence of the current global economic situation is that the United States has a large and growing trade deficit, and with the business problems and job losses to some that are the cost of the benefits of imports to many, we face increased domestic pressures to close our markets. I believe that we must strongly resist those pressures. The adverse effects of imports are concentrated, and the voices of those adversely affected are loud. The benefits of trade openness are more widely dispersed -- indeed, those who benefit are often unaware that they are doing so -- and the result is fewer, fainter voices for open markets. All of us need to work together to increase the awareness that open markets here and opening markets abroad are critical to business profitability, job growth and increased standards of living. We must also enforce our trade laws vigorously against unfair trade practices and we must help those dislocated by change -- whether from trade, or technological development, or any other source -- reenter the economy successfully and as quickly as practical.

To conclude, I think the United States is very well positioned for success in the global economy of the 21st century. However, to realize that potential, we must -- in both the private and public sectors -- meet the challenges that the greatly changed global economy poses.

This conference, in turn, is a good example of what needs to be done to promote the broad based discussion of the great changes that have occurred and the challenges we face, in order to have support necessary for the difficult decisions involved in meeting these challenges.

Again, Governor Hunt and Erskine, I appreciate this opportunity to be with you and to discuss these important issues. Thank you.