FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak with you today on the occasion of the 25th Anniversary of the Chicago Board Options Exchange. I can remember in the early 1970s when a fellow from Chicago named Joe Sullivan came around with a strange new idea, listing market options. I introduced him to our Senior Partner, a legendary Wall Street figure, named Gus Levy. Gus listened to Joe and said, "I think we can make some money here." We were already doing an active over-the-counter options market, but we got involved with Joe Sullivan, Leo Pomerantz, Eddie O'Connor and all the others in thinking about and planning this new institution and I became a founding director. When it opened its doors in April of 1973, Joe called me and said, "We're all set." We thought we would rush to the floor to make the first order, but somebody got in ahead of us. In any case, we did some 911 contracts the first day, which, relative to the over-the-counter options market, was an enormous volume, and the CBOE has never looked back.

The CBOE, the first listed market in derivatives, helped catalyze the thinking on listed futures, options on government securities and other instruments that later gave rise to the enormous market in listed derivatives. There are now 55 of these exchanges trading derivatives around the globe. Today these instruments are a vast business, which has brought substantial benefits with respect to the effectiveness and efficiency of our capital markets, but which has also created new risks that need to be effectively addressed. All of this development in derivatives has been a manifestation of how dynamic and creative our economy is -- and that dynamism and creativity are key to the success of our economy.

The development of these markets are emblematic of the emergence of the global economy and global financial markets that has occurred over the last quarter century -- and this emergence of the global economy and global financial markets have brought enormous benefits to workers, farmers and businesses in the United States, and around the globe.

Today I would like to discuss four challenges that we face if we are going to continue to be a successful economy in the years and decades ahead. Let me start by putting these challenges in the context of the present state of the economy. Today, the United States has the strongest major economy in the world, and we are viewed as a country that has put its economic house in order. Unemployment is 4.7 percent and it has been under 6 percent for the last three years. The economy has generated 15 million new jobs over the last five years, inflation has remained low and real wages are rising.

On the private sector side, this success has been critically fueled by the remarkable job American business has done over the past decade in restoring its competitiveness in a broad array of industries, after having been written off by much of the world in the preceding decade. On the public sector side, key and indispensable to the economic conditions of the past five years has been an economic strategy grounded in fiscal responsibility, beginning with the deficit reduction act of 1993, opening markets, and for the longer term, public investment in our people to promote productivity.

However, we must not let the progress we have made mask the challenges we face in building a prosperous economy and society for the years and decades ahead. If the United States were a business, and we were enjoying a period of success such as the past five years, we would think about what might be the vulnerabilities to our competitive position five, ten or fifteen years from now, and then we would position ourselves to meet those challenges. That is exactly what we have tried to do in this Administration, and in that context, let me now turn to the four challenges that I believe we must meet to continue our present economic success in the years and decades ahead, in addition to the private sector maintaining its competitiveness.

First, we must remain diligent in keeping our nation's fiscal house in order. The President has made what I believe is a sensible proposal on what to do with budget surpluses: put the money away until we address Social Security reform. The President is now actively working to foster debate and discussion to lead to a consensus. At the same time, there are proposals for tax cutsor spending increases that are not fully paid for which threaten the fiscal discipline we have worked so hard to restore. Fiscal discipline is not an easy path, but I believe it is the essential path.

Second, we must continue to work to improve education in all of its aspects, but especially our public school system. In today's global economy, education is the key to prosperity for an individual, and for a country. This Administration has focused intensely on improving education from K-12 and beyond by expanding Head Start, proposing voluntary national standards, proposing in the present budget funding for school construction and hiring more teachers to reduce class size, and last year's enacted post secondary school tuition tax credits. But, clearly, much more needs to be done.

Third, we face the challenge of tremendous social costs and loss of productivity that result from having millions of Americans left out of the economic mainstream -- a problem that is most closely associated with our inner cities. This is a problem that affects all of us, no matter where we live or what our incomes may be. Just think of the difference it will make with respect to reducing social costs and improving productivity and fostering growth if we can bring all Americans into the economic mainstream. The Administration has been active on many fronts and in addition there have been many innovative programs happening in state governments, local governments and in the private sector. For example, I recently visited one right here in Chicago --the Runner's Club, a mentoring program that pairs successful businessmen with budding African American entrepreneurs to assist them as they start their businesses.

Early in the Administration, a reporter from a well respected European weekly interviewed me, and at the end, said that our economy was doing very well but that ten or twenty years from now we'd be a second tier economy. I asked why he thought that, and he said the answer was our public schools and our inner cities. My own view, now that I've spent five years focusing on our economy and economies around the world, is that we have tremendous strengths and a great potential in a global economy, but we do need to more effectively deal with the critical issues that reporter identified if we are to fully realize that potential.

Fourth and finally, we must continue to be deeply engaged in providing leadership on the issues of international economic policy. A successful strategy on these issues to promote American prosperity in the global economy includes three components: first, opening markets and trade liberalization; second, promoting growth and reform in the developing world and transitional countries; and third, dealing with the problems of financial instability and crisis when they occur, both immediately, and in the long term, by strengthening the architecture of the international financial system. Let me discuss the point of financial instability for a few minutes.

As I said earlier, the development of the global economy and global financial markets have brought tremendous opportunities for American workers, farmers, and businesses. But there have also been risks, and these have been brought home by the financial crisis in Mexico in 1995, and most recently in Asia.

As you well know, by doing everything sensible to help these Asian countries get back on track, we support our exports to the region and help strengthen their currencies, which helps the competitiveness of our goods in world markets and we reduce the risk that financial instability will spread to other developing countries. That is why the United States has exercised very strong leadership throughout this situation to help resolve the Asian crises.

Moreover, even before the turmoil in Asia, the United States and the international community have been working to strengthen the international financial architecture. Our aim is to promote broadly shared growth in both the developed and developing world, to be better able to prevent future crises, and to deal with them when they occur; in short, to make the architecture as modern as the markets. We began this effort four years ago at the Naples G-7 meeting. Working together, the G-7 launched the first concretes steps the following year at the summit in Halifax. This process involves great intellectual complexities and great international political complexities and will occur not at one time, but in pieces over an extended period of time. And, let me note, derivatives and other off-balance sheet items will be one of the most complex facets of this process.

Let me briefly focus on three areas:

First, providing better information through improved disclosure and transparency. As all of you know very well, in the modern, complex global financial markets investors need more types of information then ever before. When investors are well-informed, use that information wisely, and expect to bear their consequences of their actions, they will make better decisions. That is good for them and can be a powerful force in promoting good policies among nations. National policy makers also need better information, to guide their actions, and anticipate potential problems.

However, just as important as having good information is using that information well. One of the things that amazed us during the Asian crisis was how few of the international creditors and investors in these economies had appropriately focused on the risks involved. One of the things we have to do is maximize incentives for investors and creditors to use the available information and appropriately weigh risk.

One aspect of transparency and disclosure has to be for public and private institutions to better identify and disclose the effects of derivatives and other off-balance sheet items on financial risks and vulnerabilities. In addition, regulators need access to this type of information and need to be able to share information with their colleagues in other countries in order to better respond to problems as they develop.

Our second area of focus is on building strong national financial sectors. A common element amongst the countries involved in the crisis in Asia -- and, for that matter, in virtually all countries experiencing financial crises -- is a badly flawed domestic financial sector. Given the effects that weak financial systems can have internationally, the time has come for a more systematic approach to strengthening national financial systems that would involve a more intensive assessment of the vulnerabilities in national financial systems. We have proposed a series of concrete steps to strengthen financial sectors through enhanced international surveillance.

Our third area of focus is on creating mechanisms so that the private sector more fully bears the consequences of its credit and investment decisions, including in times of crisis. In a world in which trillions of dollars flow through international markets every day there is simply not going to be enough official financing for the crises that could take place. There is also a risk with international assistance of what economists call "moral hazard:" that providing official financial assistance shields creditors and investors from the consequences of bad decisions and sows the seeds of futures crises. Some protection of creditors may result as a by-product of the overarching objective of restoring financial stability, but this protection should be kept to the minimum possible. However, while the whole question of private sector involvement is extremely complicated, we are exploring various mechanisms so investors bear more responsibility for their actions, and thus have a better incentive to analyze and weigh risks appropriately.

While we are focusing on strengthening the architecture, it is absolutely imperative that IMFresources be sufficient to deal with new crises should they occur. IMF resources are at historic lows. The Senate has passed legislation to approve the U.S. contribution to the IMF by a vote of 84-16 but there is a serious bottleneck in the House. While the probability of the crisis worsening or spreading or of a new crisis is low, the potential impact on our economy of any crisis is simply too great to risk not having the capacity to respond effectively. While the day to day battles overfunding in Washington may seem remote to you, every day that Congress does not approve the President's request for IMF funding increases our vulnerability to a crisis. The debate over IMF funding symbolizes one of the key lessons which I have drawn from the last few years: there needs to be a redoubled effort by all of us to communicate with the American public the dynamics of the new global economy and the importance of U.S. leadership in the global economy to our well being. I am deeply concerned that public support for forward looking international economic policies may be moving backwards at a time when this country's economic, national security and geopolitical interests require just the opposite. In this regard, the business community has a crucial role to play. It is unique in that it understands the importance of these issues -- and has the means to promote that understanding.

One of the real problems that stands in the way of building support for a forward-looking international agenda is that the benefits of globalism are not evenly shared. One troubling facet of the global economy is that workers with high skills and in high-value added industries are doing very well, but low-skilled workers and workers with low education are too often not doing as well. So even while most Americans are enjoying the benefits of our growing economy, too many people are being left behind. Ultimately, this is an issue we need to address if we are to build support for flexible labor markets, trade liberalization and maintaining leadership in the global economy.

The U.S. is well positioned to maintain a strong economy for the future. But our success depends on business doing what it must to maintain its competitiveness and government doing what it can to address the issues I have discussed. If we work together, we can keep the economy on the right track and meet the challenges of the new century. Thank you very much.