deleveraging that is hopefully winding down. if the purported benefits are small, what are the possible costs? first, without clear terms and goals, quantitative easing becomes an open - ended commitment that leads to maintaining the funds rate too low and the federal reserve ’ s balance sheet too large. the result is a further misallocation of resources, more imbalances and more volatility. there is no working framework that defines how a quantitative easing program would be managed. how long would the program continue, and what would be the ultimate size? would purchases of long - term assets continue until the unemployment rate is 9 percent or 8 percent or even less? would purchases continue until inflation rises to 2 percent or 3 percent or more? would the program aim to reduce the 10 - year treasury rate to 2¼ percent or 2 percent or even less? without answers to these and other questions, qe2 becomes an open - ended policy that introduces additional uncertainty into markets with few offsetting benefits. as central bank assets expand under quantitative easing, what will be the exit strategy? in the midst of a financial crisis, we may not have the luxury of thinking about the exit strategy. in current circumstances, however, we must define an exit strategy if the objective is to raise inflation but contain interest rate expectations. if history is any indication, without an exit strategy the natural tendency will be to maintain an accommodative policy for too long. while i agree that the tools are available to reduce excess reserves when that becomes appropriate, i do not believe that the federal reserve, or anyone else, has the foresight to do it at the right time or right speed. it may work in theory. in practice, however, the federal reserve doesn ’ t have a good track record of withdrawing policy accommodation in a timely manner. second, we risk undermining federal reserve independence. qe2 actions approach fiscal policy actions. purchasing private assets or long - term treasury securities shifts risk from investors to the federal reserve and, ultimately, to u. s. taxpayers. it also encourages greater attempts to influence what assets the federal reserve purchases. when the federal reserve buys long - term securities – such as the $ 1. 2 trillion in mortgage backed securities it purchased during the financial crisis – it favors some segments of the market over others. and when the federal reserve is a ready buyer of government debt, it becomes a convenient source of cash for fiscal programs. during a crisis this may be justified, but as

were most likely to fail. the wave of losses, consumer foreclosures and business failures infected every element of the economy. the deleveraging process commenced as highly - leveraged financial institutions, working with highly - leveraged consumers and business, had insufficient capital to withstand the financial blows. increasing numbers of homeowners were unable to keep up with their mortgage payments, leading to higher defaults. mortgage defaults, in turn, sharply lowered the values of mortgage securities held by financial institutions. these losses led banks to attempt to reduce their leverage, which required rebuilding tangible capital and reducing total assets – thus reducing loans. this placed downward pressure on asset values, losses worsened and the vicious cycle of deleveraging worsened. homes and businesses were lost to foreclosure and liquidation, while unemployment climbed. the large increases in leverage over the past decade have wrecked havoc on our economy and are responsible for the sluggishness of our recovery. strong economic growth simply cannot occur if consumers and businesses must focus on rebuilding balance sheets instead of on increasing spending, production and hiring of new workers. once again we have learned that the double edged sword of leverage is a pro - cyclical weapon. constraining leverage today, the largest financial firms are showing a solid recovery. regional and community banks continue to show stress but problems may have peaked as they have worked to reestablish stable capital and leverage levels. the market appears to be correcting and leverage based on high quality capital is returning to more historic norms. in time credit will once again expand and the economy will improve. but it won ’ t be quick or easy. therefore, we must now turn to actions that will prevent the impulses of consumers, businesses, and financial institutions from assuming ever more leverage as the expansion becomes a boom. if we take action now, then when the next economic correction occurs there will be less devastation to our economy. if we don ’ t change policy now, then this crisis will be remembered only in text books and leverage will rise again and lead to another crisis. i strongly support establishing hard leverage rules that are simple, understandable and enforceable and that apply equally to all banks and bank holding companies that operate in the united states. as we saw in the years leading up to the current crisis, leverage tends to rise during economic expansions as investors and lenders forget their past mistakes and believe that prosperity will continue with no end in sight. straightforward leverage and underwriting rules are not procycl