Timothy F Geithner: Reducing systemic risk in a dynamic financial system Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at The Economic Club of New York, New York, 9 June 2008. *  *  *  Since the summer of 2007, the major financial centers have experienced a very severe and complex financial crisis. The fabric of confidence that is essential to the viability of individual institutions and to market functioning in the United States and in Europe proved exceptionally fragile. Money and funding markets became severely impaired, impeding the effective transmission of U.S. monetary policy to the economy. Central banks and governments, here and in other countries, have taken dramatic action to contain the risks to the broader economy. Why was the system so fragile? Part of the explanation was the size of the global financial boom that preceded the crisis. The larger the boom, the greater the potential risk of damage when it deflates. The underpinnings of this particular boom include a large increase in savings relative to real investment opportunities, a long period of low real interest rates around the world, the greater ease with which capital was able to flow across countries, and the perception of lower real and inflation risk produced by the greater apparent moderation in output growth and inflation over the preceding two decades.
And also worthy of note is our work, together with the Ministry of Finance, on the initiative for the pension savings formation model through Individual pension capital. By our estimate, the work on this project is now quite advanced. We have undertaken a few rounds of both departmental and expert discussions. I very much hope that these changes will be accepted, as they will provide citizens with better quality of life, and generate a long-term source of funding for the economy, which is vital for investment development. And the last thing I wanted to mention, which I believe to be particularly important – when working on scenarios, on forecasts, on the budget – is our interaction with the Ministry of Finance and the Ministry of Economic Development in preparing a firmly grounded medium-term macroeconomic forecast. Because this forecast provides direction not only for the budget, but also for businesses in our economy and economic subjects, and I hope that this work will also help to ensure consistency of views on macroeconomics and economic policy, because this is also very important. In the last two years we really have been consistently working together, and in our opinion this work has indeed paid off. And to wrap up I would like to extend my thanks once again to all the 3/4  BIS central bankers' speeches  staff of the Ministry of Finance for the constructive cooperation that we have developed, for your high professionalism, and for your responsible and involved attitude to work.