that tools were available to choke off the stock market boom, but those tools would only have been effective if they undermined market participants'confidence in future stability. market participants, however, read the resilience of the economy and stock prices in the face of monetary tightening as an indication of undiscounted market strength. by the late 1990s, it appeared to us that very aggressive action would have been required to counteract the euphoria that developed in the wake of extraordinary gains in productivity growth spawned by technological change. in short, we would have needed to risk precipitating a significant recession, with unknown consequences. the alternative was to wait for the eventual exhaustion of the forces of boom. we concluded that the latter course was by far the safer. whether that judgment continues to hold up through time has yet to be determined. * * * flexibility is most readily achieved by fostering an environment of maximum competition. a key element in creating this environment is flexible labor markets. many working people equate labor market flexibility with job insecurity. despite that perception, flexible labor policies appear to promote job creation. an increased capacity of management to discharge workers without excessive cost, for example, apparently increases companies'willingness to hire without fear of unremediable mistakes. the net effect, to the surprise of most, has been what appears to be a decline in the structural unemployment rate in the united states. protectionism in all its guises, both domestic and international, does not contribute to the welfare of american workers. at best, it is a short - term fix at a cost of lower standards of living for the nation as a whole. we need increased education and training for those displaced by creative destruction, not a stifling of competition. moving forward, i trust that we have learned durable lessons about the benefits of fostering and preserving a flexible economy. that flexibility has been the product of the economic dynamism of our workers and firms that was unleashed, in part, by the efforts of policymakers to remove rigidities and promote competition. although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades. to be sure, that stability has created some new challenges for policymakers. but more fundamentally, an environment of greater economic stability has been key to the impressive growth in the standards of living and economic welfare so evident in the united states. 4 / 5 5 / 5

. banks have focused on c & i lending because business borrowers ’ creditworthiness is improving and because the majority of c & i loans carry floating interest rates that reduce interest rate risk. in addition, domestic banks reportedly are picking up customers as a result of a pullback by some european institutions. auto lending also has reportedly been solid, reflecting strong fundamentals in auto markets – such as robust demand for used cars and relatively low delinquency rates on existing auto loans. the strong fundamentals for auto loans in turn also appear to have contributed to an easing of lending standards and terms. but, as i mentioned earlier, residential mortgage lending has been particularly sluggish. tight lending standards and terms remain especially evident. to be sure, a return to pre - crisis lending standards for residential mortgages wouldn ’ t be appropriate ; however, current standards may be limiting or preventing lending to many creditworthy borrowers. for instance, in the april sloos, we asked banks a hypothetical question about their willingness to originate gse - eligible mortgages relative to 2006 for borrowers with a range of credit scores and available down payments. the sloos found that even when the loans were accompanied by a 20 percent down payment, many banks were less likely to originate loans to borrowers with given gse - eligible credit scores, despite the originating bank ’ s ability to sell the mortgage to the gses. most banks indicated that their reluctance to accept mortgage applications from borrowers with less - than - perfect records is related to “ putback risk ” – the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way. small businesses owners, who in the past might have tapped into the equity in their homes or used their homes as collateral for small business loans, also have found conditions challenging in recent years. the stock of small loans to businesses on bank balance sheets at the end of last year was more than 15 percent below its peak in 2008. these loans looked to have ticked up in the fourth quarter of 2011, consistent with the reported increase in demand for loans by small firms in the sloos. responses to the monthly national federation of independent business survey also suggest some modest improvement in the small business sector : the share of respondents reporting a need for credit has moved up from lows of recent years, and the net share of respondents who say that credit is more difficult to obtain than it was three months ago is notably