that the evolution of these new, complex instruments has been a negative development. indeed, these instruments have allowed the separation of different types of risk, such as credit and market risk. this has promoted better risk - management practices, and has allowed different types of risk to be borne by those best able to do so. securitization has encouraged innovation and enhanced the ability of the banking sector to originate new loans while remaining well capitalized. the final point to make in terms of the causes of this summer's turbulence has to do with how these complex securities are valued. trading of these securities in the secondary market is rare and, if trading does occur, it takes place in the over - the - counter market. as such, prices for these securities are not very transparent. most of these highly structured securities are valued on a " marked - to - model " basis, meaning that statistical models are used to provide values. but the models typically provide only estimates of values, and these estimates can vary widely if there are changes in the assumptions on which they are based. indeed, many of the models assume that the assets underlying these securities can be readily traded in a liquid secondary market. in august, it became clear that this assumption would not always hold. so, we can now see many of the factors that made credit markets vulnerable to this summer's dislocations. the re - pricing of risk i mentioned earlier was, in fact, under way before august. by late spring, the spreads on lower - rated corporate bonds had begun to widen to levels that were closer to historical averages. as we moved into summer, however, we saw rising delinquency rates and higher probabilities of default on u. s. subprime mortgages. and so, there were rising expectations of losses for holders of securities backed by these mortgages. but because of the complexity and opacity of some of these securities, it was extremely difficult for investors to determine, with confidence, both the creditworthiness of the assets backing a particular security and the market value of the security itself. in these circumstances, uncertainty led to contagion and dislocations in money markets more generally, even those markets that have nothing to do with u. s. subprime mortgages. market liquidity, which was recently thought to be too abundant, became scarce. some investors found that the assets that they assumed were liquid were, in fact, frozen. even the market for overnight

the net debt service burden ( figure 4 ). however, the low interest rates and enlarged balance sheet, which has generated these reduced borrowing costs, will not be sustained over time. recall that the federal reserve ’ s policy decisions are motivated solely by monetary policy considerations – how best to achieve maximum sustainable employment and price stability. this means that the ancillary effects on the federal deficit from the fed ’ s monetary policy actions are incidental and will prove temporary. eventually, as economic and financial conditions improve, the pursuit of the dual mandate will lead to a different monetary policy stance, one that requires higher short - term interest rates. and, the federal reserve will also eventually shrink the size of its balance sheet. these actions will tend to increase the treasury ’ s net interest costs and pull down the federal reserve ’ s remittances to the treasury. together, these two effects will sharply push up the treasury ’ s net interest burden. to show how this may play out, let ’ s use as an illustration a “ current policy ” baseline based on information provided by the congressional budget office, including its macroeconomic assumptions. under these assumptions, the output gap is closed and monetary policy is normalized by 2017. as shown in figure 5, net debt service is projected to rise to 3. 3 percent of gdp by fiscal year 2020 up from 1. 0 percent in 2011, based on an assumption that the interest rate for three - month treasury bills will rise from around 10 basis points today to 3. 8 percent by 2020 and the interest rate on benchmark 10 - year treasury securities will increase from around 2 percent today to 5 percent by 2020. on top of this, federal reserve remittances are projected to fall sharply. in its recent current law baseline projection, the cbo calculates that net remittances will decline from a peak of 0. 55 percent of gdp in 2011 to a long - run average of around 0. 2 percent by 2017 and beyond. thus, on the current policy baseline, the combined effect of higher debt service and lower remittances will total 2 ¼ percent of gdp by fiscal 2020 relative to the current fiscal year ( figure 5 ). of course, this assumes that interest rates follow the trajectory used in the cbo baseline. if interest rates rose faster and reached a level 100 basis points higher in 2020 than what the cbo has assumed, the net debt service burden would be about 3 ¼ percentage points higher by 2020, all else equal.