overnight credit to depository institutions through the discount window. the fed ’ s management of credit risk associated with these various forms of shortterm lending relies heavily on supervisory information. in normal times, this information often is bernanke ( 2006 ) explains the usefulness of the " indirect regulation " approach to hedge funds. this approach avoids the costs of direct regulation by relying on the self - interest of hedge - fund counterparties and investors to exert market discipline on these organizations. these institutions include the depository trust company ( a state member institution ) and the cls bank international ( an edge act corporation ). in principle, legislation to give the federal reserve direct oversight authority over systemically important payments systems could reduce the fed ’ s need to rely on its bank supervisory powers in this area. however, the fed ’ s supervisory activities also provide it with information about payments systems from the vantage points of system users ( that is, the banks that make and receive payments ), providing useful additional perspectives both on the functioning of the payments systems themselves and on the risks to banks and other financial institutions that arise in the process of clearing and settling transactions. obtained from other banking agencies. when a financial institution is under considerable stress, however, it is helpful to have available in - house supervisors who can independently assess the borrowing institution and evaluate its collateral. 5 i have described several ways in which the fed ’ s supervisory authority assists it in performing its other functions. in my view, however, the greatest external benefits of the fed ’ s supervisory activities are those related to the institution ’ s role in preventing and managing financial crises. bank supervision and the prevention and management of financial crises although the federal reserve is today best known to the public as the agency responsible for monetary policy, the fed was founded in 1913 largely in response to the periodic episodes of banking panics and other forms of financial instability that had plagued the u. s. economy during the nineteenth and early twentieth centuries ( friedman and schwartz, 1963 ). 6 today, the fed retains its key role in the prevention and mitigation of financial crises, for a number of reasons. first, the fed has unique powers to provide liquidity to the financial system, through means that include open - market purchases, discount - window loans, and intra - day overdrafts. second, as i have noted, the fed is a key player in the payments system, functioning both as an overseer of systemically important clearing - and - settlement systems and as

alan greenspan : finance - united states and global remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, at the institute of international finance, new york, ( via videoconference ), 22 april 2002. * * * in recent weeks, economic forecasters in the united states have been debating whether an apparent turning point in the current business cycle augurs a modest or a more robust recovery in the months ahead. much less attention has been paid to a far more significant event : the impressive ability of the american economy to withstand a severe decline in equity asset values, a sharp retrenchment in capital spending, and an unprecedented blow from terrorists to the foundations of our market systems. as i outlined in congressional testimony last month, if the indications that the contraction phase of this business cycle has drawn to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect. remarkably, the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester. the obvious questions are, what has changed in our economy in recent decades to produce such resilience, and will these changes persist into the future? doubtless, the substantial improvement in the access of business decisionmakers to real - time information has played a key role. thirty years ago, the timeliness of available information varied across companies and industries, often resulting in differences in the speed and magnitude of their responses to changing business conditions. in those earlier years, imbalances were inadvertently allowed to build to such an extent that their inevitable correction engendered pronounced economic stress. the process of correcting those imbalances and the accompanying economic and financial disruptions too often led to deep and prolonged recessions. today, businesses have large quantities of data available virtually in real time. as a consequence, although their ability to anticipate changes in demand seems little improved, they, nonetheless, address and resolve economic imbalances far more rapidly than in the past. the apparent increased flexibility of the american economy arguably also reflects the extent of deregulation over the past quarter century. certainly, if the energy sector were still in the tight regulatory fetters of the 1970s, our flexibility today would be markedly less. that the relatively recently developed markets for natural gas and electric power endured the enron collapse without significant disruption was encouraging. although the terrorist attacks hit air travel especially hard, dereg