lowering the federal funds rate 50 basis points on september 17 and an additional 75 basis points by the end of the year. over the past few months, we have all been watching closely to see how aggregate activity would unfold in the aftermath of the terrorist attacks. no doubt a great deal of pain has been inflicted on the economy. but, given the magnitude of the shock, the economy has proved more resilient than initially anticipated. while several industries have been hit very hard, the worst - case scenarios spun in late september have not materialized. in particular, households'views of the economy have remained relatively stable, all things considered. in fact, in one of the most recent readings, consumer confidence was not much lower than it had been in august. while spending has surely been buttressed by some temporary factors such as aggressive discounting on motor vehicles and other retail goods, the effect of terrorism on consumer spending has not been as severe as most had feared in late september. to be sure, 2001 was a rough year for the economy - - one of the roughest we have faced in a long time. the weak economic outcome despite sizable reductions in the federal funds rate has led some to question the effectiveness of monetary policy. but i believe that monetary policy substantially cushioned the negative forces weighing on the economy. residential construction has been visibly buoyed by policy easing. housing activity remained at a high level all year, as lower mortgage rates apparently offset the restraint from declines in employment, smaller gains in income, and lower levels of wealth. also, although delinquency rates have risen, few restrictions have emerged on the availability of credit to consumers. indeed, low interest rates have made it attractive to refinance mortgages to reduce mortgage payments, extract some home equity buildup, and pay down more expensive forms of consumer credit. even businesses, which have been feeling the pinch of lower corporate profits, have benefited from lower interest rates ; aggregate interest expense has remained fairly low relative to cash flow, and businesses have moved aggressively to bolster their financial stability by locking in more - assured, longer - term sources of funds. automakers in particular have been able to offer inexpensive financing to customers because their own funding costs have fallen. in many ways, the mechanism that propagated the weakness last year was quite traditional : a negative demand shock led to an unwanted accumulation of inventories and to an adjustment of production. that, in turn, idled workers and fed back into even weaker demand.

- extension chain. first, at the point of origination, underwriting standards became increasingly compromised in recent years. the most notorious example is, of course, u. s. subprime mortgages. in this case, as in others, the incentives faced by originators were an important source of the breakdown in underwriting. the revenues of the originators of subprime mortgages were often tied to loan volume rather than to the quality of the underlying credits, which induced some originators to focus on the quantity rather than the quality of the loans being passed up the chain. however, the problems with subprime mortgage underwriting were disguised for a time by the continued appreciation in home values. as long as house prices kept rising, president's working group on financial markets ( 2008 ), " policy statement on financial market developments ", march 13 ; financial stability forum ( 2008 ), “ report of the financial stability forum on enhancing market and institutional resilience ", april 7. subprime borrowers saw their home equity increase and were often able to refinance into more - sustainable mortgages. but when house prices began to stagnate and then fall, many subprime borrowers found themselves trapped in mortgages they could not afford. because subprime loans were frequently securitized and incorporated into complex structured products, the resulting losses spread throughout the financial system. although subprime mortgages are the most well - known instance of underwriting failure and were in some sense the trigger of the turmoil, the loosening of credit standards and terms occurred more broadly, even as market risk premiums contracted. for example, investors were willing to purchase so - called leveraged loans – used to finance mergers or buyouts – with few covenants or other protections. the pwg concluded that investors often took insufficient care in evaluating the risks of credit products, in part because they relied too much on evaluations provided by the credit rating agencies. unfortunately, the methodologies, data, and assumptions the agencies used to rate structured credit products proved deficient in many cases. when rising delinquencies and losses on mortgages forced the agencies to sharply downgrade many of these products, investors lost confidence in those ratings and became unwilling to provide new funds. as financing disappeared, the markets for structured credit products and for related investments seized up. another significant factor contributing to the financial turmoil was risk - management weaknesses at large global financial institutions that created and held complex credit products