but that they also undertake their own assessment. and i would suggest that the value of independent due diligence on the part of market participants is especially high for newer and more - complex products. encouragingly, we have examples of some firms recognizing the potential risks of broad market disruptions, for example, if there were dramatic and unexpected price movements, or if market illiquidity set in. those firms faring better typically use a number of tools to assess risk positions that draw on differing underlying assumptions. such tools provide management with more information and different perspectives on its potential risk exposures. in the best cases, the tools are flexible enough to allow perspectives on risk to change as business conditions change. for example, they can help identify when risk concentrations are changing as a result of market movements or changes in counterparty positions. liquidity risk management now i wish to consider the third fundamental. liquidity risk management. banks, of course, have been managing expected liquidity demands since the beginning of banking itself. 4 because of its central role in the business of banking, liquidity risk requires rigorous and effective management. naturally, financial institutions both large and small must pay careful attention to liquidity risks, even if they manifest themselves in different ways. regarding recent events, a number of financial firms were surprised by the extent of market disruptions and were forced to take funding actions not anticipated in their contingency funding plans, including some decisions to support affiliates that were based on reputational concerns rather than contractual obligations. at the same time, some institutions were able to avoid more serious problems from these events by aligning treasury functions more closely with risk - management processes and incorporating information from all businesses into global liquidity planning, including actual and contingent liquidity risk. they also made attempts to embed market liquidity premia or apply market liquidity haircuts in pricing models and valuations. recent events have shown that during times of systemwide stress, liquidity shocks can become correlated so that the same factors that can lead to liquidity problems for the bank's assets or off - balance sheet vehicles can simultaneously put pressure on banks'own funding liquidity. again, we see the trouble that risk concentrations can cause if an institution has not tried to identify them in advance and take steps to mitigate their effects. as with other risk areas, supervisors suggest extensive use of firm - wide stress testing to ensure the incorporation of low - probability but potentially severe liquidity events that may have the potential to

long as the federal reserve is committed to achieving its inflation objective. in the simulations reported by reifschneider, “ gauging the ability of the fomc to respond to future recessions, ” in note 8, overcoming the effects of the zero lower bound during a severe recession would require about $ 4 trillion in asset purchases and pledging to stay low for even longer if the average future level of the federal funds rate is only 2 percent. bis central bankers ’ speeches for these reasons, policymakers and society more broadly may want to explore additional options for helping to foster a strong economy. on the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. for example, future policymakers may wish to explore the possibility of purchasing a broader range of assets. beyond that, some observers have suggested raising the fomc ’ s 2 percent inflation objective or implementing policy through alternative monetary policy frameworks, such as price - level or nominal gdp targeting. i should stress, however, that the fomc is not actively considering these additional tools and policy frameworks, although they are important subjects for research. beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns. a wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy. 25 for example, steps could be taken to increase the effectiveness of the automatic stabilizers, and some economists have proposed that greater fiscal support could be usefully provided to state and local governments during recessions. as always, it would be important to ensure that any fiscal policy changes did not compromise long - run fiscal sustainability. finally, and most ambitiously, as a society we should explore ways to raise productivity growth. stronger productivity growth would tend to raise the average level of interest rates and therefore would provide the federal reserve with greater scope to ease monetary policy in the event of a recession. but more importantly, stronger productivity growth would enhance americans ’ living standards. though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training ; promoting capital investment and research spending, both private and public ; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals. conclusion although fiscal policies