As noted above, many of the emergency liquidity facilities rolled out in the crisis were developed in a very short period of time by experts with years of experience in these various markets. All of the new facilities were designed to price the emergency liquidity such that as market stresses eased, their use would decline. This is exactly what happened. Furthermore, the most convincing evidence that the facilities correctly addressed market failures related to liquidity is the fact that none of them lost any money.19 Conclusion The past few years have seen important changes in the role of central bank interactions with financial markets. Some of the main lessons I take away are: published statistics and market prices only tell part of the story of developments in financial markets, at best; beliefs of market participants and the distribution across markets matter, and information on them needs to be collected and analyzed on a frequent basis; active operations in financial markets allow central banks to flexibly respond to unexpected events and understand market functioning issues and changes in market infrastructure. Most importantly, the global financial  18  The Federal Reserve established swap arrangements with the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, the Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank.

The basic skills that economists can bring to such meetings are a framing of developments based on the efficient markets hypothesis, which holds that financial markets will quickly incorporate all relevant information in asset prices, along with an understanding of economic fundamentals. Many commentators have associated a blind faith in efficient markets by market participants and regulators as one of the main underlying causes of the crisis.6 This seems an overly simplistic and mostly incorrect characterization. A partially correct aspect of this critique is that market discipline failed in the period before the crisis. However, this is not a true rejection of the efficient markets hypothesis, as expounded by Gene Fama, but rather a failure for incentives to be appropriately aligned.7 An efficient markets explanation usually involves a great deal of the Monday morning quarterbacking: after observing market moves that prove an analysis incorrect, there is usually a tweak to this previous analysis prompted by the market move, which does not require any substantial changes to an underlying view. To outsiders this might sound like cheating, but if the efficient markets hypothesis has validity, then unexpected market moves always contain new information over the original analysis. Indeed, the ability of individual markets to efficiently aggregate diverse sources of information most of the time is why the efficient markets hypothesis gained empirical support.8  6  See Adam B. Ashcraft and Til Schuermann (2008), “Understanding the Securitization of Subprime Mortgage Credit” Federal Reserve Bank of New York Staff Reports No.