responses, even when successful in combating financial instability, may not be enough to support the resumption of trend economic growth over the medium term. why is government action aimed at financial stability not sufficient to usher in a new era of prosperity? because the broader financial architecture remains in substantial flux, as is sometimes unavoidable. confidence in markets and institutions cannot be demanded or forced by edict. confidence in a new architecture cannot be jury - rigged, even by welldesigned government actions. nor can confidence be rushed. comprehensive policy prescriptions to address financial instability are now being delivered to the ailing patient. but a dose of patience itself may be equally important to help the recuperative process. time is required for the medicines to be administered and their efficacy to be judged. new prescriptions, however well intentioned, can prove unsettling to a patient who is searching to find his footing. of course, policy must respond to serious situations as they arise ; and, during the past 15 months, these developments have been difficult to anticipate with precision. but, if the framework for policy decisions is not viewed as clear, consistent, and predictable by market participants, the resulting actions run the risk of contributing to, rather than reducing, market volatility – at the most inauspicious of times. see kevin warsh ( 2007 ), " financial stability and the federal reserve, " speech delivered at the new york state economics association 60th annual conference, loudonville, new york, october 5. finally, actions intended to help achieve financial stability should not be allowed to interfere with the establishment of a sturdy, new financial architecture. concluding remarks i am reminded of a certain omaha - based investor who says that his investment style is to be greedy when other investors are fearful, and be fearful when others are greedy. 11 i would modify the advice somewhat to make it applicable to policymakers : we should be steady when financial market participants are fearful, and fearful when markets appear steady. this call for steadiness is not some nostrum, implying that the government should be passive during times of significant economic turmoil. quite the contrary. but comprehensive policy prescriptions are most effective when they establish new rules of engagement that are clear in intent, consistent in application, and reasonably predictable in effect. this policy formulation should allow financial firms to regain their footing and market participants, more broadly, to take new, constructive actions to facilitate the availability of credit. perhaps in this way, policy

achieve improved macroeconomic performance. during this period of turmoil, the fed has increasingly been called upon to be a steadying influence. when appropriate, and after due consideration, the fed has chosen to employ its balance sheet, authority, and credibility to lessen the harm to the real economy. that is our role and responsibility. but we should resist the temptation to play a larger role than statutorily mandated or economically prudent. good - faith pleas for relief in the name of financial stability will continue for some time, and the fed should carefully consider the facts and circumstances. that period of consideration may require us, however, to be cognizant of the perils of popularity and decline to take action, including when it may be more properly considered or better addressed by the fiscal authorities. so it is, financial stability has become the watchword of the global economy. but its frequency in our lexicon should not be confused with clarity as to its meaning or the timing of its achievement. nor should it be construed as the sole beacon of policy. what is financial stability? it is perhaps easier to define by its absence. 10 financial instability is a situation in which stresses on markets and institutions are sufficiently severe that the intermediation between borrowers and savers is threatened, with the prospect of significant risks to the broader economy. financial stability, moreover, should not be equated with an absence of volatility. if some unexpected news arrives, markets adjust, often sharply. generally, these adjustments are not cases of financial instability. a healthy and wellfunctioning financial system will reward well - managed risk - taking and punish imprudence, sometimes harshly. such outcomes are not pretty and can be marked by large and pervasive losses, but most do not necessitate extraordinary policy interventions. nonetheless, circumstances of pronounced financial instability, while rare, do arise. in the most recent episode, we policymakers deemed it necessary to take significant actions to mitigate the risks to the real economy. financial firms became highly protective of their balance sheets and sought to disengage en masse from the provision of credit. the fed responded, introducing lending facilities designed to support liquidity in overnight and shortterm funding markets. with the approval of the congress, treasury also took significant action, making large capital injections directly into banks to help jump - start the credit intermediation process. this action was supplemented by various forms of government guarantees. but bold official policy