spreads and other measures of risk perceptions, risk aversion, and reduced supply of credit at benchmark interest rates. in the current circumstances, some of the tightening we have seen has been in anticipation of possible adverse events in the economy and in confidence toward the financial sector. these types of actions not only move up the demand - for - credit curve, but they also bolster profits going forward to cover potential write - offs and to attract new equity capital. pressures on profits arise not only from write - offs, but also because some sources of earnings, like securitization of mortgages or leveraged loans, are no longer available. in the steady state, lenders will get greater returns for taking risk than they did two years ago, intermediaries will be less leveraged and better capitalized, and the financial system will be more robust and resilient to shocks. the transition to the new steady state, however, as lenders deleverage and protect themselves against various downside risks, involves some overshooting – making terms and standards tighter than will be necessary over the long run. this story is completely consistent with the one told in the hatzius paper, which relies mostly on quantity relationships to gauge the possible effects on gross domestic product ( gdp ). my instinct has been to go from the actual and expected indicators of tightening supply, such as the instrumental variables used in the paper, directly to estimates of the effects of that supply shift on gdp. measures of flows would fall out of that exercise, but not be its focus. and i have questions about the stability and reliability of the debt - gdp relationship used in the forecasts at the end of the paper. but i will admit that we are in uncharted waters here, and the navigators shouldn't discard any potential information about the location of the shoals. the message of the paper is that restraint on credit supplies is likely to persist because intermediaries have some way to go to rebuild their balance sheets. the process of adjustment to a safer, more resilient financial system is going to take a while. i agree with this observation.

increasing complexity of mortgage securities, including multiple securitizations of the same loan, which made it virtually impossible for ultimate lenders to monitor the creditworthiness of borrowers – a task they, in effect, had outsourced to credit rating agencies. the absence of investor caution and due diligence was especially noticeable for the highest - rated tranches of securitized debt. elevated leverage in housing markets has meant that as prices have fallen, lenders have had to absorb an unusually high proportion of the losses. as case points out, foreclosures by lenders have added to the downward pressure on those prices. conceptually, such price declines moving down the demand curve for housing services could accelerate and cushion the adjustment in activity necessitated by previous overbuilding. i am encouraged that case the views i express are my own and not necessarily those of other members of the board of governors. the three papers discussed and their authors are as follows : ( 1 ) " financial regulation in a system context, " by stephen morris and hyun song shin, professors of economics at princeton university ; ( 2 ) " beyond leveraged losses : the balance sheet effects of the home price downturn, " by jan hatzius, chief u. s. economist at goldman sachs ; and ( 3 ) " the central role of house prices in the financial crisis : how will the market clear? " by karl case, professor of economics at wellesley college. information about the 2008 fall conference on the brookings papers on economic activity is available at the brookings website. finds the pace of declines abating in a number of markets. however, partly owing to the feedback of price declines on lenders, mortgage conditions have tightened some since the late spring readings he is using for his conclusion, and in my view, the jury is still out on whether housing prices are close to finding a bottom. the heavy involvement of financial intermediaries in amplifying the housing boom and the subsequent economic effects of the bust brings me to the morris and shin paper, which raises a host of important issues related to the systemic aspects of financial intermediation and the lessons from the recent turmoil. as they emphasize, one of the important lessons has been the greater - than - expected vulnerability of secured financing when intermediaries are engaged in maturity, credit, and liquidity transformation. recall that the turmoil first came onto the balance sheets of the banks through the collapse of the asset - backed commercial paper market last fall before it affected