Indeed, equity markets continued to operate throughout the crisis, in that investors were able to transact and price discovery was occurring. The same was true for most high-quality corporate bonds, even though that market had more notable episodes of illiquidity. The fact that these markets held up better than others in part reflects that they were less dependent on the availability of leverage and on the continued value of the assets as collateral. Moreover, the crisis did not reveal any major structural flaws in equity and corporate bond markets, thus paving the way to a vigorous recovery of those assets. Indeed, risk premiums on both of these assets have narrowed sharply since early 2009, and corporate bond issuance has rebounded impressively. This recovery has been driven by market forces. Firms have been motivated to issue bonds in order to reduce their reliance on bank funding and other sources of short-term credit, while investors have realized that corporate yield spreads offered appealing returns given that firms in most sectors appear fairly healthy. Lastly, while not a U.S. asset market, it is worth mentioning the performance of the foreign exchange markets, particularly for this audience. Foreign exchange markets also functioned relatively well during this period of turmoil. This resilience has been highlighted in recent reports issued by the Foreign Exchange Committee in the United States and by similar bodies abroad. Broadly speaking, trading in spot foreign exchange markets remained transparent, accessible and relatively liquid.

Overall, the reforms in these markets, along with the regulatory reforms to the oversight of financial institutions, should result in more robust system of credit intermediation, whether it is taking place through traditional intermediaries or through the markets more broadly. This reform process faces several important risks, though. First, there is a possibility that the process will stagnate or end up incomplete, given that the issues are complex, the stakeholders are numerous and the solutions are not always obvious. Second, there is a risk that, with so many efforts taking place in so many areas, the results will not fit together into an effective, cohesive solution. And third, there is the risk that the pursuit of reform will be overly zealous, resulting in a set of restrictions that will significantly undermine the functioning of financial markets during normal periods and thereby impede employment and growth. On this last point, it is worth making a few observations about the functioning of financial markets as we think about how to encourage a safe and yet efficient financial sector. These points may be obvious but are worth emphasizing. First, securitization is a powerful vehicle that should play an important role in the intermediation of credit in the economy. Securitization can be quite effective at transforming illiquid assets into negotiable securities and transferring risk to a more diversified set of holders. To be sure, the expansion of securitized credit was much too extensive, and its subsequent collapse was terribly disruptive, contributing significantly to the damage to the economy.