a more profound panic phenomenon. market participants wonder whether the forms of financial intermediation and functions of financial institutions – long connecting savers with investors – will be implemented in a manner that will enhance, or reduce, economic well - being. some are questioning the efficacy of the remaining vestiges of the existing financial architecture and remain uncertain of the timing, efficacy, and policy preferences for the financial architecture that will ultimately emerge. surely, they applaud the goal of policymakers to reform the financial system to make it more durable through the cycle and less susceptible to shocks. but some query whether policy actions are, on balance, lessening or stoking panic conditions. articles of faith headlines have been dominated in recent weeks by the legal rules that govern contracts. to be sure, markets function best when economic actors comport themselves in a manner consistent with the rule of law. 10 fidelity to the rule of law is not just some aphorism for a judicial system to protect property right disputes among private parties. nor should it be just some preachy truism of economic development for emerging economies. rather, it is the linchpin of modern market economies like ours. and it suffers its greatest blow when the governing authorities are unwilling to uphold their end of the bargain. nonetheless, despite some highly publicized suggestions to the contrary, i remain highly confident that the government will work tirelessly to uphold its obligations. hewing to the rule of law, however, may be the easier part. the panic bred by the loss of confidence in the underlying financial architecture is difficult to remedy beyond the purview of statutes and regulations. a weighty accumulation of unwritten, but no less critical, practices and understandings governs behavior and establishes expectations in market economies. over time, these informal understandings attract deep and loyal followings by economic actors. they become articles of faith. deviations from them tend not to be illegal, but they can markedly change perceptions of risk and return. when that happens, the resulting expectations are unmoored, with significant and often highly detrimental consequences for market functioning and economic progress. panics can thus be understood as periods in which key articles of faith are cast in doubt. how does this happen? after long periods of economic prosperity – in the most recent case, the so - called great moderation – articles of faith accumulate. some of these understandings the global equity markets underperformed those in the united states. the dow jones global index fell 15 percent from

, " fears were raised about others. fund outflows escalated rapidly, threatening the stability of short - term funding to businesses and municipalities. confidence in money center banks plummeted, as was the case a century before. and market participants lost trust in their counterparties. extraordinary actions, however, have been taken – with some notable success – to lessen panic conditions. panics involve losses of confidence in the financial system, when even sound firms find it difficult to borrow. panics are threatening to economic well - being. panics take even less kindly to, and often result from, uncertainty. and panics place a greater burden on the deftness of policy responses than recessions alone. our economic history contains many contractions in output – and losses in wealth – that were unconnected to panics. 5 in the panic of 2008, however, the breakdown in the financial sector has contributed to, and exacerbated, the economic downturn. economic and financial conditions the current financial and economic turmoil is marked by indicia of both recession and panic conditions. by official measures, the current recession is already significant in scale, scope, and duration. and the deterioration in employment conditions in the current episode already ranks comparably to the recession of 1981 - 82. the unemployment rate is 8. 5 percent and likely, in my view, to increase steadily through the balance of the year. economic output, as measured by gross domestic product, contracted at a rate of about 6 - 1 / 4 percent in the fourth quarter of 2008 and is on track to contract sharply again in the first quarter, which would put the current contraction among the most severe post - world war ii recessions. though the pace of decline is likely to abate, i am decidedly uncomfortable forecasting a sharp and determined resumption of growth in the coming quarters. the panic conditions that have marked this period may also have long - run implications. i suspect that the process of an efficient reallocation of capital and labor will prove slower and more difficult than is typical after recessions. policymakers should be wary of policies that make the milton friedman and anna schwarz ( 1963 ), a monetary history of the united states, 1867 - 1960 ( princeton : princeton university press ). see o. m. w. sprague ( 1910 ), history of crises under the national banking system ( washington : government printing office ), p. 259. see joseph davis ( 2004 ), " an annual index of u