Today, America is enjoying a very special moment. There are many reasons for our prosperity: our fiscal discipline; our success in developing important new technologies; the vitality of America's entrepreneurs. But I am convinced that an important part of the credit for our unprecedented economic performance goes to the unparalleled strength and dynamism of our financial markets:
- No other country offers such a deep and liquid capital market or such an impressive venture capital industry.
- No other financial market is so open to foreign competition or so quick to innovate, whether it be in the area of securitization, financial derivatives, high-yield debt, or equity finance.
- And no other financial system has so effectively maintained the appropriate balance between high-quality regulation and the absence of excessive state interference.
In a very real sense, the financial system is the central nervous system of our economy. And just as the past dynamism of our financial sector has been central to America's current prosperity, so the future success of that sector will be very important to the well-being of the economy as a whole.
That future will depend on the continued dynamism of our financial sector players. But it will also depend, in part, on what the public sector does. Today I will briefly reflect upon the roles that the public sector can play in helping to promote continued prosperity and economic well-being. I will focus upon the important policies that have helped to form the foundations of our current prosperity including, first, our sound macroeconomic policies and, second, our strong legal and regulatory framework of financial markets. Finally I will briefly turn to the long-term challenges facing our financial system and the way that the private and public sector can and must work together to meet those challenges.
I. The Importance of Providing a Stable Macroeconomic Environment.
The most dynamic financial system in the world has been built on private sector ingenuity. But it could not have emerged except on a foundation of old virtues.
It is no accident that our economic success over the last few years has coincided with the emergence of a new national consensus in support of sound macroeconomic policies. Under the leadership of President Clinton and Vice-President Gore, we have succeeded in moving from an era of economic uncertainty to one that is built on a sound and sure macroeconomic footing.
- By respecting the independence of the Federal Reserve, we have helped it to focus successfully on maintaining price stability with continued rapid growth.
- By recognizing that a strong currency is in our national interest because it has helped to hold down inflationary pressures and capital costs.
- Most important of all, by establishing a new paradigm for the management of our nation's budget, we have helped to usher in an era of prospective surpluses, with enormous cumulative benefits for our economy and our citizens.
By embracing enhanced fiscal discipline, we have helped turn a vicious cycle into a virtuous cycle. By moving from an era of budget deficits to one of budget surpluses we have freed up resources for private sector investment that has raised the level of productivity and the rate of economic growth and in turn boosted budget surpluses and around again and again in a virtuous circle.
Like tax cuts, reducing publicly held debt also delivers substantial direct benefits to the pockets of American families: first, because it reduces the future burden of payments on interest and principal; and second, because it helps put downward pressure on long-term interest rates. Indeed, as a result of our new path of fiscal discipline and the resulting downward pressure on interest rates, a typical American family with a mortgage of $100,000 would save $2,000 a year in interest rates.
As we look to the future, we can surely all agree on the enormous importance of working to maintain our macroeconomic stability. It is not a question of ideology, but of providing the most effective framework for the continued success of the New Economy -- to which the financial sector makes such a significant contribution.
II. Providing a Strong Legal and Regulatory Framework for the Financial Markets.
Once again, the continued vitality of our financial sector depends first on the entrepreneurship and dynamism of its participants. But the public sector also has its part to play in helping to maintain the competitiveness of the system as a whole.
The Clinton Administration has taken clear steps to strengthen the integrity of America's financial system. Let me mention three:
- First, by breaking down outdated barriers between banks and other financial service companies, the 1999 Financial Modernization Act opened the door to greater innovation and competition. We have equipped the financial industry to take advantage of the rapid technological changes that are taking place, while providing consumers with greater choice and lower costs.
- Second, by passing the Electronic Signatures in Global and National Commerce Act earlier this year, we have helped remove legal impediments to conducting transactions on-line. This legislation is a major milestone in the development of electronic finance. It provides the legal certainty for electronic transactions that business needs. And it ensures that consumers will continue to benefit from the protections they currently enjoy offline.
- And third, we have made significant progress towards the enactment of legislation that would reform the legal and regulatory framework affecting the OTC derivatives market. Taken together, these changes would provide legal certainty, contribute to the reduction of systemic risk, protect retail customers, stimulate the competitiveness of America's financial markets, and thereby help to create jobs and lower costs for American consumers and businesses. We have achieved an extraordinary bipartisan consensus this year on these very complex issues. Let me take this opportunity to urge Congress to enact these reforms as soon as possible.
III. Longer-Term Challenges for America's Financial System.
By drawing on a spirit of cooperation between the private sector and the public sector, over the past 8 years this Administration has worked to provide the right framework for our financial industry to thrive. Let me focus my remaining remarks on some of the key challenges that the American financial sector -- and all those with a stake in its continued success -- will be confronting in the years to come.
First, adapting to a world where boundaries are disappearing.
Combined forces of integration and innovation are bringing us to a world of shifting boundaries and blurring distinctions: whether those be between countries; between sectors; or between financial sector products that were once thought to be quite distinct. And policy makers in the financial sector must address the question of how our national and international regulatory frameworks should adjust to keep pace.
As innovation and integration proceed, both the desire to maintain a level playing field and the desire to avoid a race to the bottom between competing jurisdictions are likely to produce increasing pressure for the development of common standards. These pressures have already given rise to quite dramatic regulatory changes in a number of countries: most notably, perhaps, in the UK, which has combined all of its financial regulators under one umbrella.
None can predict what the right solution for the US will be. But we can predict that these challenges are likely to increase as the closer integration of different parts of the financial system - and different national financial systems - gains pace. And we can agree that the goal should be to avoid excessive regulatory overlap and to achieve greater coherence: for both consumers and producers.
In this context, the privacy protections of the financial modernization legislation of 1999 are perhaps worth highlighting, as the first significant set of regulatory restrictions applied to every financial institution, regardless of charter or industry, because we believed they presented the same privacy concerns.
Second, adapting to a world where there is less Treasury debt.
Another fundamental shift are the implications of a declining debt stock. I have already mentioned the enormous economic benefits that derive from our fiscal discipline. The best way to continue to enjoy those benefits is to continue to pay down our national debt. This macroeconomic objective must be central to our fiscal strategy in the years ahead.
At the same time, we recognize that there are micro-economic implications that arise from the paying down of public debt in America. There can be no question of diluting our broader macroeconomic objective to avoid facing the micro-economic consequences. However, these microeconomic challenges can and must be addressed. The key will be to find a way to confront them in a way that is good for the financial system and good for the economy.
Treasury securities currently serve a number of important functions in the global financial markets: as a pricing benchmark: as a hedging vehicle; and as a risk free asset. The dual challenge we face is to promote liquidity, so that Treasury securities play these roles for as long as possible, at the same time as facilitating the market's longer term adjustment to a world in which the stock of Treasury debt is substantially reduced.
In the end, it will be the private sector that decides which benchmarks and hedging vehicles will gradually supplement US Treasuries. Whether individual market participants use swaps, corporate debt, or other alternative benchmarks, we know that the financial markets have an impressive capacity to innovate in a changing world. But in a world of declining publicly held debt, it becomes even more important to ensure that our regulatory and legal structures enable this innovation to proceed. Indeed, it must add even greater urgency to the need for Congress to establish legal certainty for the swaps market.
Third, guarding against complacency in the financial markets.
We are enjoying the longest period of economic growth in our history; our markets have remained a source of opportunity while weathering a series of recent crises; and our financial sector continues to be the world leader. For these reasons, we are justifiably confident about the strengths of America's financial industry. But we must not allow our confidence to spill over into a sense of complacency.
As we have learned from experience, market over-confidence can lead to vulnerability. We must be vigilant as well toward issues such as lack of transparency, the risks that hedging strategies and models may not live up to their design, and the toxic combination of excessive leverage and illiquidity.
As I have stated before, it is the private sector, not the public sector, that is in the best position to provide effective supervision and reduce the likelihood that these issues rise to a level that could threaten market stability. Market discipline is the first line of defense in maintaining the integrity of our financial system.
In the past few years, the private sector has risen to meet the challenges posed by recent crises, and we have seen significant self-correction where excesses had developed. Individual institutions are taking steps to improve their risk management practices. At the same time, recent experience has underlined that policy makers and regulators will need to play their part to assure that complacency does not reverse this progress:
- First, by working to create an environment in which market discipline can work effectively. Counterparties and creditors have more knowledge of their counterparts, more skill in evaluating risk and greater incentives than any public regulator will ever have. The best approach to regulation designed to address systemic risk is therefore to maximize the quality of counterparty discipline and to ensure that public activities do not crowd out the supervision provided by counterparties, creditors and investors.
- Second, by promoting the maximum degree of transparency, because transparency is the necessary corollary to counterparty discipline. The government cannot impose counterparty discipline, but it can help to enhance the effectiveness of market discipline by creating an environment of greater transparency and disclosure. Indeed, the long history of transparency in our financial markets has been a source of great strength, and a leading factor in maintaining the integrity of U.S. markets.
- Third, by working to maintain the competitiveness of the system as a whole. Just as there is a sharp distinction between support for the free enterprise system and support for individual enterprises, so also the task of public policy must be to ensure the stability and integrity of the market system rather than to seek to ensure the survival of individual firms or investors. Regulation must never hold out the prospect that it can eliminate risk or that it can prevent any individual institution from failing. Any regime that had that effect would be perverse and counterproductive and undermine market discipline.
There are a number of steps the government can take in fulfilling such roles. We continue to work with the private sector on a number of specific initiatives. In addition, we are actively promoting legislation that would contribute to the efficiency, transparency and competitiveness of American markets, such as the Commodity
Futures Modernization Act of 2000, which is currently before the Congress. Similarly, we are promoting legislation that would help further reduce systemic risk in our financial system by allowing the netting of financial contract obligations in instances of bankruptcy or insolvency. We believe that our markets will not be fail-safe until they are safe for failure. The provisions of this legislation - that is currently before Congress - would reduce the likelihood that the failure of any one institution would pose a threat to the stability of our financial system more broadly. Rarely does government have the opportunity to take tangible steps to meaningfully reduce systemic risk. Adopting this legislation is one such step and we urge Congress to do so at the earliest possible opportunity.
At the same time, the benefits of improving netting procedures go beyond the realm of bankruptcy to the basic "plumbing" of our financial system. Improving the plumbing may not be glamorous. But it is a vital part of our objective of minimizing the effects of crises. If these and other plumbing measures such as the "T+1" settlement initiative being promoted by the SIA, harmonized documentation, and contractual uniformity, had been in place, the financial environment in September 1998 would have been much more secure.
Measures such as these enable creditors, counterparties, and investors to better play the lead role that they must in ensuring the integrity of our market-based financial system.
IV. Concluding Remarks
Let me end where I began. These are prosperous times for America. And these prosperous times are owed in no small part to the dynamism and ingenuity of our financial sector. What is crucial is that we do not take these good times for granted. That means all of us working to maintain the macro-economic and micro-economic foundations of this success - and to respond as prudently and effectively as possible to the challenges that this fast-changing 21 st century economy brings.