intelligence, as well as the increased operational coverage and resiliency that support adaptation to changes in market structure or operating directives. but diversity also entails complexity and requires initial and ongoing investment in infrastructure to support a wider range of firm types. evaluating and onboarding firms, setting up transactional systems and account arrangements, and monitoring and evaluating counterparty performance and risk all take time and resources that must be balanced against the potential benefits of a larger list. 7 one final consideration that bears mention is the concept of an imprimatur that some market participants associate with status as a new york fed counterparty. despite this long - standing perception among some market participants that primary dealer status represents an endorsement by the new york fed of a financial institution ’ s creditworthiness or ability to provide efficient execution of large transactions, we have repeatedly stressed the importance of other market participants ’ engaging in their own assessment of potential counterparties ’ capabilities. recent history provides several reminders that the primary dealer designation provides no guarantee against credit risk or other counterparty risks. while the new york fed certainly performs its own due diligence, we do so in pursuit of our unique business objectives, which may differ from those of private agents. market participants should therefore be since july 2013, the desk has conducted pilot programs with seven smaller firms outside of the primary dealer system in order to explore how to conduct open market operations in treasury and mortgage markets with firms that are considerably smaller than existing primary dealers. the treasury operations counterparty ( toc ) and mortgage operations counterparty ( moc ) pilot programs have provided valuable insight into the appropriate size and operational capacity of open market operation counterparties. bis central bankers ’ speeches engaging in the appropriate level of due diligence required by their fiduciary responsibilities in the context of their specific business requirements. such independent assessments are in our collective interest because they foster market discipline and a safer, more secure financial system. primary dealer history the pursuit of these objectives is reflected in the history of the fed ’ s counterparty framework, of which the primary dealer system has long formed the foundation. but before i review that narrative, i must acknowledge that most of what i know about the history of primary dealers i ’ ve learned from ken garbade, who kindly introduced me tonight. along with his superb analysis of the evolution of the treasury market, exemplary work for the tmpg and critical contributions during the financial crisis, ken has expertly researched more than 100 years of history concerning the financial

the major policy failures of the 1970s were largely due to policymakers ’ exaggerated real - time measures of economic slack. the second distinctive feature of the pre - crisis monetary policy paradigm stemmed from a complete under - appreciation of the role of money and credit indicators in the conduct of monetary policy. liquidity and money lie at the core of the ecb ’ s second pillar. but they were at best ignored, at worst “ derided ”, as redundant and unnecessary complications by mainstream modellers before 2007. the crisis has shown that liquidity and various definitions of money are critical links in the transmission mechanism. far from showing a lack of theoretical foundations in the ecb ’ s strategy, the crisis has exposed the incompleteness of the transmission mechanism in the reference model. but disregard for monetary and financial phenomena had another implication. it found a clear counterpart and theoretical underpinning in the risk management approach to asset price trends. the consensus view in pre - crisis times was that the best thing that central banks could do was to “ clean - up ” following the bursting of a bubble by loosening the monetary policy stance. i do not need to underline how this approach can turn into a formidable multiplier of market turbulence. the expectation that the central bank will aggressively protect the markets from “ tail events ” in bad times can encourage – and did encourage, in my view – markets ’ tendency to opt for risky strategies, over - exposures and exuberance. in summary, there was an inherent contradiction in some of the salient features of the precrisis monetary policy paradigm. on the one hand, central bank policy “ activism ” was seen as justified in order to help with short - term output stabilisation purposes. yet activism did not apply to financial risks except in an entirely ex post fashion : proponents of policy “ activism ” see blinder, a. s. and reis, r. ( 2005 ), economic performance in the greenspan era : the evolution of events and ideas, paper presented at the federal reserve bank of kansas city symposium on “ rethinking stabilization policy ”, jackson hole, wyoming. bis central bankers ’ speeches saw no merit in a central bank ’ s ex ante intervention to stem asset price developments, arguing that the policy interest rate was too blunt a tool to contain potential bubbles. 2. central bank response to the crisis and “ the new normal ” the central bank response to the crisis, by any metric, has been unprecedented. when tensions in