they would purchase tips at a price above that implied by their expected payment stream. as such, inflation risk premiums result in lower expected borrowing costs for the government and savings for the tips program compared with nominal issuance. to determine which factor has been historically dominant, we conduct an ex - ante cost analysis : we compare the amount that the treasury received for inflation compensation at auction with an observable measure of the inflation expectations of tips investors that is not contaminated by premiums for inflation risk or liquidity differentials. unfortunately, we don ’ t have a perfect measure of expected inflation. nevertheless, we may be able to get close. we do have estimates of expected inflation from other sources – such as the survey of professional forecasters ( spf ) conducted by the federal reserve bank of philadelphia. if such measures do indeed reflect the inflation expectations of investors, then we can conduct a reasonably accurate ex - ante analysis. tips analysts often talk about a concept they call the breakeven inflation rate. essentially, this is the realized inflation rate that would cause investors to come out the same in terms of total compensation regardless of whether they had bought tips or nominal treasuries. the difference between the auction breakeven inflation rate and the spf forecast yields a measure of the net savings or loss incurred by the treasury that is independent of forecast errors. it is also equal to the net value of the illiquidity and inflation risk premiums associated with each tips. our analysis, which covers tips auctions through april 2008, found that prior to 2004, the breakeven inflation rate was below the spf. this indicates that the illiquidity premiums exceeded the inflation risk premium over this period. however, since 2004, we find that breakeven inflation rates were approximately equal to expected inflation, indicating that investors were roughly indifferent between the benefit of being protected against inflation risk versus the cost in terms of the greater illiquidity of tips relative to onthe - run nominal treasuries. thus, on an ex - ante basis, it appeared that the cost of issuing tips was about equal to the cost of issuing nominal treasuries. to determine the impact of the illiquidity premium and inflation risk premium on these results, we decomposed our ex - ante analysis, comparing the breakeven rate of inflation excluding the illiquidity premium in tips yields 3 to the spf forecast. this comparison yields an in addition

the financial crisis have been remedied. important changes include mandatory clearing of standardized over - the - counter derivatives through central counterparties, or ccps ; more intensive supervision of systemically important ccps ; and reforms of the tri - party repo system and the money market mutual fund industry. but, even as we reduce or eliminate old vulnerabilities, we must not rest on our laurels, for new vulnerabilities will inevitably take their place. these accomplishments notwithstanding, i have no doubt that the current regulatory framework could be improved. indeed, the official sector should assess the efficiency and effectiveness of regulations on an ongoing basis. i agree with vice chairman quarles ’ observation that there is more we can do to make the regulatory regime more efficient, transparent, and simple — including relief for small banks, greater tailoring based on a firm ’ s level of systemic importance, and simplifying the volcker rule. 5 some of these changes have already been adopted or are in process. greater focus on incentives is needed but, i also think we must take a broader view of what characterizes a resilient and robust financial system. to that end, we need to carefully monitor the incentives that influence the behavior of financial firms and their employees. indeed, the record from the crisis and more recent years shows just how powerful incentives can be in driving firms and individuals to do things that are imprudent and / or unethical. bad incentives can lead to conduct that not only generates large risk exposures and market excess, but also erodes trust and confidence in the financial system. for example, the pre - crisis housing boom would not have gone so far, for so long, without the widespread breakdown in mortgage underwriting practices that was driven by poor incentives. 6 some examples of bad incentives that contributed to the financial boom and bust included : compensation practices at financial firms that rewarded volume and short - term performance over longer - term, sustainable returns ; the willingness of the credit rating agencies to designate tranches of subprime mortgages triple - a in exchange for fees paid by a small number of issuers of mortgage - backed 2 / 8 bis central bankers'speeches securities ; the willingness of fannie mae and freddie mac to use their implicit government support to take on large amounts of mortgage risk with very little capital backing ; the willingness of aig to use its triple - a rating to provide credit protection to banks and securities firms against complex mortgage obligations with little direct capital support