been reviewed by examiners within the federal reserve system. more generally, we have directed our examiners to be mindful of the procyclical effects of excessive credit tightening and to encourage banks to make economically viable loans, provided such lending is based on realistic asset valuations and a balanced assessment of borrowers'repayment capacities. across the federal reserve system, we have implemented training and outreach to underscore these intentions. we are mindful of the potential for bankers to overshoot in their attempt to rectify lending standards, and want them to understand that it is in their own interest to continue making loans to creditworthy borrowers. conclusion the u. s. banking industry is facing serious challenges. the federal reserve, working with the other banking agencies has acted – and will continue to act – to ensure that the banking system remains safe and sound and is able to meet the credit needs of our economy. we have aggressively pursued monetary policy actions and provided liquidity to help repair the financial system. in our supervisory efforts, we are mindful of the risk - management deficiencies at banking institutions revealed by the current crisis and are ensuring that institutions develop appropriate corrective actions. it will take some time for the banking industry to work through this current set of challenges and for the financial markets to recover. during that recovery, the economy will need a strong and stable financial system that can make credit available. the challenge for regulators and other authorities is to support prudential bank intermediation that helps restore the health of the financial system and the economy as a whole. we want banks to deploy capital and liquidity, but in a responsible way that avoids past mistakes and does not create new ones. bankers should operate prudently in the current challenging environment, but should not let fear drive their decisions. the federal reserve will continue to work with other banking agencies and the congress to promote the concurrent goals of fostering credit availability and a safe and sound banking system. " federal regulators encourage institutions to work with mortgage borrowers who are unable to make their payments, " ( april 2007 ).

forces lessen the basic external imbalance, they increase the basic budget imbalance. in the long run, the only way to correct budget deficits is for policymakers to correct them. outside forces there are several outside forces - both natural and as a result of policy - that could influence budget and trade deficits. one generally helpful influence is productivity growth. say the u. s. economy benefits from an exogenous positive shock to productivity growth, as it seemed to have in the late 1990s. this shock would raise the trend path of income, meaning that slightly higher primary budget and trade deficits could still be consistent with debt - to - gdp stability ; in effect, a higher level of g can be plugged into equation 2 ( at least as long as it is not offset by a higher i ). higher productivity could also help lengthen the credibility range, the range in which moderate changes in the debt ratio might not lead to adverse changes in relative prices. among other things, higher productivity could raise the marginal product of capital and make investment in u. s. assets relatively attractive. but even with these favorable developments, the stability conditions discussed above still hold. if they are violated, the natural adjustment mechanisms will eventually take over for the trade deficit, and the primary budget deficit will eventually have to be reduced to stop a growing government debt ratio. one unhelpful measure is trade protectionism. while it might appear that trade protectionism would correct trade deficits, it probably will not. over the medium and long run, the economy should be producing near its natural growth path, perhaps because of timely monetary and / or fiscal policy, perhaps because of natural equilibrating forces in the economy. in this event, trade protectionism would not stimulate added national production. even if protectionist measures reduce imports, the added spending demands for import - competing industries will crowd out other types of production. put another way, equation 1 shows that the trade deficit is ultimately determined by national saving and investment. without a change in these, protectionism merely shifts the types of goods that are produced. it does not increase overall production and, short of cutting off trade altogether, does not even change the trade balance. moreover, as is well known, over the long run, trade protection lowers a nation ’ s standard of living. finally, suppose politicians actually do correct budget deficits, again assuming an economy near its medium - term growth path. as mentioned above, such a fiscal austerity