was clear in communicating to you that policies to achieve this goal are designed to help main street and not to bail out wall street. pursuing such policies does help financial markets recover from episodes of financial instability, and so it can help lift asset prices. but this does not mean that market participants who have been overly optimistic about their assessment of risk don't pay a high price for their mistakes. they have, and that is exactly what should happen in a well - functioning economy – which, after all, is what the federal reserve is seeking to promote. references bernanke, ben s. ( 2007a ). " the financial accelerator and the credit channel ", speech delivered at the credit channel of monetary policy in the twenty - first century conference, federal reserve bank of atlanta, atlanta, georgia, june 15. _ _ _ _ _ _ _ _ _ ( 2007b ). " the recent financial turmoil and its economic and policy consequences ", speech delivered at the economic club of new york, new york, october 15. bernanke, ben s., and mark gertler ( 1995 ). " inside the black box : the credit channel of monetary policy transmission ", journal of economic perspectives, vol. 9 ( autumn ), pp. 27 - 48. mishkin, frederic s. ( 1997 ). " the causes and propagation of financial instability : lessons for policymakers ", in maintaining financial stability in a global economy, proceedings of a symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyo., august 28 - 30, pp. 55 - 96. _ _ _ _ _ _ _ _ _ ( 2007 ). " financial instability and the federal reserve as a liquidity provider ", speech delivered at the museum of american finance commemoration of the panic of 1907, new york, october 26.

one important one is the credit channel. the credit - channel view holds that monetary policy has additional effects because interest rate decisions influence the cost and availability of credit by more than would be implied by the associated movement in risk - free interest rates ( bernanke and gertler, 1995 ; bernanke, 2007a ). for example, an easier monetary policy strengthens the balance sheets of borrowers. this stronger financial position, in turn, enables the borrower to reduce its potential conflict of interest with the lender, either because the borrower is able to self - finance a greater share of its investment projects, or because it can offer more or better collateral to guarantee its liabilities. as a result, firms and households will find it easier to increase their spending. in addition to having beneficial macroeconomic effects, monetary policy can also help directly restore stability in financial markets after a period of financial instability. as we have seen, financial instability can basically be viewed as a disruption of information ; therefore, its resolution requires a restoration of information flows. monetary policy can contribute to this process by minimizing market uncertainty. i noted a moment ago that periods of financial instability are characterized by valuation risk and macroeconomic risk. monetary policy cannot have much influence on the former, but it can certainly address the latter – macroeconomic risk. by cutting interest rates to offset the negative effects of financial turmoil on aggregate economic activity, monetary policy can reduce the likelihood that a financial disruption might set off an adverse feedback loop. the resulting reduction in uncertainty can then make it easier for the markets to collect the information that enables price discovery and to hasten the return to normal market functioning. to achieve this result most effectively, monetary policy needs to be timely, decisive, and flexible. quick action is important for a central bank once it realizes that an episode of financial instability has the potential to set off a perverse sequence of events that pose a threat to its core objectives. waiting too long to ease policy in such a situation would only risk a further deterioration in macroeconomic conditions and thus would arguably only increase the amount of easing that would eventually be needed. decisive action is also important. in circumstances when the risk of particularly bad economic outcomes is very real, a central bank may want to buy some insurance and, so to speak, " get ahead of the curve " – that is, ease policy more than it otherwise would have simply on the basis of its modal economic outlook. however, because monetary policy makers can never