Nearly one year after the sweeping Wall Street collapse jolted the world, the picture of the global economy remains muddy and slippery. How are the global bailouts having an effect? What efforts are still needed to heal the financial woes? Paul A. Volcker, Former Chairman of the Board of Governors of the U.S. Federal Reserve, gave his answers to these questions at a recent Institute of International Finance (IIF) press conference in Beijing. Edited excerpts of his comments follow.

The sudden and unsettling drop in global economic activity beginning last fall is slowing, most clearly in the United States and the UK, perhaps with a short lag in Euroland, and still less clearly in Japan. A healing process in financial markets seems to be underway. Large banks, well-rated companies, and even some weaker financial organizations are finding funds available in the market. With inventories sharply lower, housing construction close to rock bottom, and the various stimulus programs approaching full force, an expectation of some growth late this year and next in the United States seems reasonable.

Prospects for a really strong recovery, typical of most recessions, seem unlikely. For most of the developed world, sources of strong spontaneous growth are hard to envisage. In the United States, as elsewhere, even modest growth remains dependent on strong fiscal and monetary stimulus. Large loan losses still need to be fully recognized. The global financial system, even if out of the emergency room, remains in intensive care.

For the time being, government spending, debt financing and the volume of credit support may be a reasonable response to the sudden rise in personal savings in the United States and the needed deleveraging process. Both the renewed savings and private debt reductions are necessary and desirable structural adjustments for the longer term. However, depressing implications in the short term have been unavoidable. This is not an environment in which inflationary pressures are at all likely for some time to come.

All in all, the needed adjustment toward a better, more sustainable balance in domestic savings and investment, international trade and capital flows will take time. Nowhere are those adjustments more necessary than in China and the United States. The two countries have been locked into widely divergent patterns of consumption and savings for too long, with the result of persistent and ultimately unsustainable imbalances in international payments.

These imbalances have for years been covered by flows of foreign official and privately held U.S. dollars back to the United States. Indirectly those flows have to some degree helped fuel the mortgage market and the housing bubble that touched off the financial collapse.

Now the brute force of recession and financial crisis is forcing the needed adjustment. But surely we need to ask ourselves whether all the unemployment, all the economic dislocations, and all the risks of protectionist pressures could not have been prevented, or they could at least have been moderated, by more effective domestic and international systems and policies.

The present state of world financial affairs adds urgency to reforming the global financial system to restore trust and confidence in the market. We believe the reform should strengthen effective risk management and put in place safeguards for the systemic soundness of markets and institutions. The reformed system also must be internally and internationally consistent—for example, capital and leverage requirements, accounting standards, clearance and settlement arrangements for over-the-counter derivatives, and practices with respect to disclosure and sharing of information.