relying as much as possible on the efforts of debtors and private creditors to work things out on their own. the perception in some circles that private creditors are not interested in resolving payment problems expeditiously is mistaken, and stands at odds with recent experience. if nothing else, investors are interested in restoring liquidity to debt instruments in order to move on to new opportunities. there is also scope for exploring creative market - based ways to lever in private participation and stretch the impact of public sector funds. finally, a successful market - based, case - by - case approach also needs to be principled. i would suggest that the essence of an effective case - by - case approach is the development of viable plans that link broader, generally acceptable principles to the particulars of a given situation. • to achieve this, a clearer and more transparent articulation of the public sector ’ s objectives is necessary. greater emphasis and clarity are needed as to the purposes and limits of public intervention, and the extent to which those interests warrant different degrees, modes, and timing of public and private sector involvement, depending on the particular country and circumstances. in this way all parties will be better placed to understand current developments and how the international community might react to future strains. the argument against standstills there are of course other points of view. i would note that some have suggested that perhaps we should go in a different direction, that we should seek to build time back in by calling a time out. in particular, it has been suggested that an early recourse to comprehensive payment standstills ( suspensions of debt service perhaps amplified or reinforced by capital controls ) would increase the manageability of crises and enhance predictability. my reading of the record convinces me that trying to freeze market processes would do the opposite. i would like to share with you my thinking on this point. • the desire for certainty and control which seems to underlie standstill proposals is understandable, as it offers the promise of using less public money, and seemingly entails less risk that creditors will be bailed out for poor credit decisions. but the control and manageability that might result may be more seeming than real. • for one, a perceived disposition to preemptively lock the door seems likely to send investors heading for the exits all that much sooner. as a result many avoidable crises soon may become inevitable. and the problem of contagion, whereby difficulties in one case spread to many, would seem likely to

a second question is, how we can structure these requirements and other aspects of regulation to damp, rather than reinforce, the natural procyclical tendencies of the financial system? among the challenges will be encouraging firms and supervisors to comfortably allow buffers to be eroded in bad times. interestingly, prompt corrective action under the federal deposit insurance corporation improvement act of 1991 was intended, in part, to induce an element of countercyclical behavior by banks. it gives banks an incentive to build excess capital – on both a risk - based and leverage ratio basis – in good times to avoid prompt corrective action when circumstances are less favorable. now that we are in the latter state of the world, a study of how commercial banks are viewing capital ratios, including the leverage ratio, could inform consideration of the morris and shin proposal. the morris and shin paper also provides a framework for thinking about the federal reserve's credit facilities. on page 9, they note that liquidity makes borrowers feel more robust and lenders less likely to withdraw, raising the odds for a more stable equilibrium for the entire system. that is exactly what we have been trying to do with our various discount lending facilities. the assurance of the availability of liquidity to sound institutions against good collateral should counter the greater uncertainty and risk aversion that have impaired normal arbitrage and intermediary functions by making those institutions more willing to extend credit and take positions in the process of making markets. it should also assure other creditors of those institutions that illiquid markets will not impede the repayment of their loans, and therefore make them more willing to keep lending. a number of markets remain disrupted and illiquid. but i believe that they would have been even more illiquid and the risk of disruptive runs even greater without our various facilities ; that's certainly what market participants are telling us. jan hatzius is trying to gauge the combined effects on spending of the losses generated by the effects of the decline in housing prices outlined in the case paper and the impulse for deleveraging in the financial sector inherent in the processes discussed by morris and shin. to restore capital ratios depleted by mortgage losses and to raise those ratios even further in order to reduce leverage to safer levels demanded by counterparties, banks and other lenders need to reduce assets. they do so by tightening terms and standards across a broad array of credit – and we have seen this behavior reflected in our surveys of bank lending officers and in various