have had an opportunity to observe that policy actions in 1987, 1998, and 2001 - 03 cushioned the economy, but they did not stop major declines in the prices of equity in 1987 and 2001 or of risky credits in 1998. short - term rates have risen substantially in the past year, reducing the profitability of " carry trades " without triggering an unwinding that drove long - term interest rates higher or widened risk premiums. and expectations that policy tightening would remain gradual over the near - term have not stopped long - term rates from fluctuating substantially in response to incoming data ; the movements of future or forward rates out the yield curve after surprises in data have been at least as large since 2003 as they were before. that is not to say that we have nothing to worry about. as i already noted, alan greenspan, himself, has often been concerned about market complacency - as recently as his latest monetary policy testimony. people may well perceive the economy as more stable than it is or central banks with greater power than we have to smooth the economy or to foresee our own actions. clearly, reminders to the public of the inherent uncertainty in economic developments and policy responses are appropriate and should have some effect. the question is whether these warnings should be supplemented by actions to inject uncertainty into policy pronouncements by saying less than we can or into the economy by shifting our objectives away from seeking the best outcome for the economy over the intermediate term. in my view, such policies would result in less accurate asset pricing, reduce public welfare on balance, and definitely be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.

that the shift from depository intermediation to professional asset management has increased tail risk to socially excessive levels and has left the world more vulnerable to rare but potentially very serious tail events ; he suggests some ways in which regulation should be increased. in assessing this argument, we might find it useful to separate the question of whether the world is riskier from the question of whether systemic risk has risen. the increased ability to disentangle risk and tailor risk profiles should mean that risk has come to be lodged more in line with investor appetites, a change that has probably tended to reduce the price of risk and encouraged riskier capital projects to be funded. but individual investors at greater risk need not imply increased systemic risk fatter tails and greater potential for losses feeding back on the macroeconomy. in fact, industrial economies have been marked by much less variability in output and inflation over the past twenty years. many reasons have been given for this so - called great moderation, but developments in financial markets have likely played a role in making the economy more resilient. as a consequence of greater diversification of risks and of sources of funds, problems in the financial sector are less likely to intensify shocks hitting the economy and financial market. the experience of 2001 - 03 is instructive. unusually large declines in equity prices and increases in defaults and risk spreads - surely tail events by most definitions - reduced wealth and raised the cost of capital but did not aggravate the downturn by impinging on the flow of funds. financial intermediaries were not so troubled as to cut off the provision of credit, and in any case, many borrowers had alternative sources of funds. in addition, we have not seen a clear upward trend in volatility of financial asset prices over the past twenty - five years, as one might expect if herding had increased in importance. judging from options prices, market participants are expecting the volatility of financial asset prices to be damped in the future ; they are also requiring lower - term premiums for placing funds for longer terms. i do not share raghu's nostalgia for the systemic - risk implications of bank - dominated finance. oldstyle crises involving impaired depository institutions had substantial spillover effects ; their repair took time, during which economic activity was affected ; and emergency measures to deal with them often involved moral hazard because they were aimed at stabilizing ailing intermediaries. i think we would all agree that the industrial