environment of several months ago, prior to the more recent financial turmoil. the appearance of these sorts of benign indicators could have provided useful testimony in support of the end - of - history thesis in the economic realm. but then what is to francis fukuyama advanced an affirmative view of this question when he published " the end of history? " ( fukuyama, 1989 ). noting that the historical origins of the phrase can be found in the writings of hegel and, later, marx, fukuyama wrote that " what we may be witnessing is not just the end of the cold war, or the passing of a particular period of postwar history, but the end of history as such : that is, the end point of mankind's ideological evolution and the universalization of western liberal democracy as the final form of human government " ( p. 4 ). the views expressed here are my own and do not necessarily reflect those of other members of the board of governors or of the federal open market committee. i am grateful for the assistance of nellie liang and steven sharpe, of the board's staff, who contributed to these remarks. a discussion of this recent " nirvanic " period is in beattie ( 2007 ). be made of the global liquidity shock that crested in august and continues to manifest itself to this day? in my view, recent financial turmoil should not be considered an accident of history. rather, it is history's latest reminder to policymakers and market participants alike that we ought to be humble in our convictions and cautious in our deeds as we seek a better understanding of what makes a strong and stable economic and financial system. the lessons learned from natural experiments in economics during recent decades offer great promise that macroeconomic performance can be improved. but as empiricists outside of our " dismal science " would remind us, there are few control groups in economics. as a result, the definitive account has not been written. nor has the practical conduct of policy yet evolved to the point at which financial crises and economic downturns can be wholly avoided. as a result, i will argue, the end of history may have to wait awhile. let me first discuss the evolution of financial markets. next, i will highlight the evolution of monetary policy and financial stability. finally, i will turn to more recent financial and monetary events. evolution of financial markets during the past several years, the cause of economic freedom and the culture of capitalism have appeared firmly on the march

supply - related price shocks. the low inflation rate has also permitted central banks to respond more forcefully to output fluctuations and more opportunistically to ensure low and stable prices. the improved inflation performance has come not at the expense of, but in conjunction with, output stability. researchers have documented the so - called great moderation, in which the u. s. economy has achieved a marked reduction in the volatility of both real gross domestic product and core inflation over the past twenty years or so. most economists would probably attribute at least some portion of the great moderation in the growth of real output to monetary policy. despite the record of steadier economic performance, bouts of financial market instability continue to arise. indeed, in my judgment, the inexorable march of technological change and creative destruction in a market economy all but assures the occurrence of such episodes ( schumpeter, 1942 ). to be sure, it is the recurrence of such episodes that supplies kindling to the debate on the appropriate balance between flexible, competitive financial markets and regulations that could limit the exuberance of market responses, irrational or otherwise. in the episode at hand, early - cycle increases in housing prices, escalating returns of leveraged buyouts, and lower all - in financing costs made possible by structured - finance products highlighted new profit - making opportunities for providers and users of capital. as economic historians remind us, more entities are thus drawn into the activity until competition pushes its boundaries beyond the point of positive returns ( kindleberger, 1996 ). eventually, some shock to the system exposes the fragility, and the shock is often followed by fear and overreaction before a new equilibrium is established. in these circumstances, financial markets often suffer from episodes of widespread illiquidity amid a rise in risk aversion among investors. policymakers and market participants know with certainty that investors'risk perceptions and preferences will change and that stresses will recur, but predicting their onset, scope, or duration is exceedingly difficult. surely, policymakers and market participants have advanced in their knowledge and in the adaptability of their tools to help mitigate these negative effects on real economic activity. but as the events of 2007 make clear, the latest chapter in economic history should remind us of the habitual, but perhaps not immutable, drivers of human behavior in financial markets. recent financial developments the consequences of the liquidity shock of 2007 on the financial markets