developments in u. s. and foreign financial markets will stimulate considerable review and analysis in the months and years to come. around the world, legislatures, regulators, supervisors, accounting boards, central banks, and others with responsibility for oversight of the financial system are already hard at work trying to distill the lessons to be drawn from this experience and their implications for policy. many in the private sector, including banks, credit - rating agencies, and the investment community, are likewise actively reviewing and responding to these developments. some of the areas that will draw scrutiny are the appropriate use of credit ratings by investors, banks, and supervisors ; the need for enterprise - wide, better - integrated risk - management techniques in large financial institutions ; the appropriateness of accounting rules governing asset valuation and the use of offbalance - sheet vehicles ; and weaknesses in the originate - to - distribute model and in the design of structured credit products, among many others. in the longer term, the response of the public and private sectors to this experience should help create a stronger financial system. the federal reserve ’ s response fortunately, after a number of years of strong earnings, most financial institutions entered the current episode in good financial condition. thus, notwithstanding the effects of multi - billion dollar write - downs on the earnings and share prices of some large institutions, the banking system remains sound. nevertheless, the market strains have been serious, and they continue to pose risks to the broader economy. the federal reserve accordingly has taken a number of steps to help markets return to more orderly functioning and to foster its macroeconomic objectives of maximum sustainable employment and price stability. broadly, the federal reserve ’ s response has followed two tracks : efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy. to help address the significant strains in short - term money markets, the federal reserve has taken a range of steps. notably, on august 17, the federal reserve board cut the discount rate – the rate at which it lends directly to banks – by 50 basis points, or 1 / 2 percentage point, and it has since maintained the spread between the federal funds rate and the discount rate at 50 basis points, rather than the customary 100 basis points. 2 the fed also adjusted its usual practices to facilitate the provision of discount window financing for as long as thirty days, renewable at the request of the borrower. loans through the discount window differ from conventional open market operations in that the loans can be made directly to individual banks

borrowers. ample evidence suggests that responsible nonprime lending can be beneficial and safe for the borrower as well as profitable for the lender. for example, even as delinquencies on subprime arms have soared, loss rates on subprime mortgages with fixed interest rates, though somewhat higher recently, remain in their historical range. some lenders, including some who have worked closely with nonprofit groups with strong roots in low - to - moderate - income communities, have been able to foster homeownership in those communities while experiencing exceptionally low rates of default. unfortunately, at this point, the market is not discriminating to any significant degree between good and bad nonprime loans, and few new loans are being made. although subprime borrowers and the investors who hold these mortgages are the parties most directly affected by the collapse of this market, the consequences have been felt much more broadly. i have already referred to the role that the subprime crisis has played in the housing correction. on the way up, expansive subprime lending increased the effective demand for housing, pushing up prices and stimulating construction activity. on the way down, the withdrawal of this source of demand for housing has exacerbated the downturn, adding to the sharp decline in new homebuilding and putting downward pressure on house prices. the addition of foreclosed properties to the inventories of unsold homes is further weakening the market. as you know, the losses in the subprime mortgage market also triggered a substantial reaction in other financial markets. at some level, the magnitude of that reaction might be deemed surprising, given the small size of the u. s. subprime market relative to world financial markets. part of the explanation for the outsized effect may be that, following a period of more - aggressive risk - taking, the subprime crisis led investors to reassess credit risks more broadly and, perhaps, to become less willing to take on risks of any type. investors have also been concerned that, by further weakening the housing sector, the problems in the subprime mortgage market may lead overall economic growth to slow. however, part of the explanation for the far - reaching financial impact of the subprime shock is that it has contributed to a considerable increase in investor uncertainty about the appropriate valuations of a broader range of financial assets, not just subprime mortgages. for example, subprime mortgages were often combined