general, i think those dual objectives – promoting financial stability and avoiding the creation of moral hazard – are best reconciled by central banks'focusing on the macroeconomic objectives of price stability and maximum employment. asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift. such a strategy would not forestall the correction of asset prices that are out of line with fundamentals or prevent investors from sustaining significant losses. losses were evident early in this decade in the case of many high - tech stocks, and they are in store for houses purchased at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely. these are my views and are not necessarily those of my colleagues on the federal open market committee. to be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment. but these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson. the design of policies to achieve medium - term macroeconomic stability can affect the incentives for future risk - taking. to minimize moral hazard, central banks should operate as much as possible through general instruments not aimed at individual institutions. open market operations fit this description, but so, too, can the discount window when it is structured to make credit available only to clearly solvent institutions in support of market functioning. the federal reserve's reduction of the discount rate penalty by 50 basis points in august followed this model. it was intended not to help particular institutions but rather to open up a source of liquidity to the financial system to complement open market operations, which deal with a more limited set of counterparties and collateral. the effects of financial markets on the real economy related developments in housing and mortgage markets are a root cause of the financial market turbulence. expectations of ever - rising house prices along with increasingly lax lending standards, especially on subprime mortgages, created an unsustainable dynamic, which is now reversing. in that reversal, loss and fear of loss on mortgage credit have impaired the availability of new mortgage loans, which in turn has reduced the demand for housing and put downward pressures on house prices, which have further damped desires to lend. we are following this trajectory closely, but key questions for central banks, including the federal reserve, are, what is happening

. - 2most large global firms. however, a successful spoe resolution of a large global firm has not yet been attempted and will require close cooperation among a large number of stakeholders, including both home and host country regulators. this cooperation will be based on an understanding of separate and mutual interests, not on trust alone. so while spoe creates a potentially workable framework for resolution, setting the conditions for cooperation is critical. i grew up among the ranches of the american west, where we lived by the motto taught to me as a young child : trust everyone, but brand your cattle. this is a theme that will run throughout my remarks today. in addition to setting the stage for effective cooperation, i will focus specifically on the type of ring - fencing that will almost certainly undermine the successful execution of an spoe resolution - - namely the disruptive seizure of assets by host regulators in the moment of stress. as with other elements of our regime, i have been considering whether our current prepositioning requirements for domestic and foreign firms operating in the united states are both minimizing this risk and functioning in an efficient and transparent manner, and i will share some thoughts in that regard. our vantage point in the united states as a large home and host regulator would counsel that it is sensible to find a middle ground and fine tune our approach as we learn more and global conditions evolve. resolution considerations of a home and host regulator to enable cooperation and avoid a destabilizing seizure of assets by host regulators, i would submit that all jurisdictions must find a balance of flexibility for the parent bank and certainty for local stakeholders. flexibility, or the ability to allocate capital and liquidity to different parts of the group on an as - needed basis, helps to meet unexpected demands on resources and reduces the risk of misallocation and inefficient use of resources. certainty, or the - 3local prepositioning of capital and liquidity to ensure a firm can satisfy local claimants under stressful conditions, helps to promote cooperation in the context of a cross - border resolution and avoid incentives for more drastic action by host authorities. one ’ s assessment of the optimal balance, as i alluded to earlier, can depend significantly on where one sits in the regulatory constellation. the home regulator, by nature, will logically prefer flexibility in a resolution ; consolidated capital and liquidity requirements are most effective if resources can be freely allocated around the consolidated firm where and when they are needed. flexibility