general, i think those dual objectives – promoting financial stability and avoiding the creation of moral hazard – are best reconciled by central banks'focusing on the macroeconomic objectives of price stability and maximum employment. asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift. such a strategy would not forestall the correction of asset prices that are out of line with fundamentals or prevent investors from sustaining significant losses. losses were evident early in this decade in the case of many high - tech stocks, and they are in store for houses purchased at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely. these are my views and are not necessarily those of my colleagues on the federal open market committee. to be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment. but these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson. the design of policies to achieve medium - term macroeconomic stability can affect the incentives for future risk - taking. to minimize moral hazard, central banks should operate as much as possible through general instruments not aimed at individual institutions. open market operations fit this description, but so, too, can the discount window when it is structured to make credit available only to clearly solvent institutions in support of market functioning. the federal reserve's reduction of the discount rate penalty by 50 basis points in august followed this model. it was intended not to help particular institutions but rather to open up a source of liquidity to the financial system to complement open market operations, which deal with a more limited set of counterparties and collateral. the effects of financial markets on the real economy related developments in housing and mortgage markets are a root cause of the financial market turbulence. expectations of ever - rising house prices along with increasingly lax lending standards, especially on subprime mortgages, created an unsustainable dynamic, which is now reversing. in that reversal, loss and fear of loss on mortgage credit have impaired the availability of new mortgage loans, which in turn has reduced the demand for housing and put downward pressures on house prices, which have further damped desires to lend. we are following this trajectory closely, but key questions for central banks, including the federal reserve, are, what is happening

of euro area gdp, roughly the same share as extra - euro area imports. this is substantially higher than in the united states, where exports represent about 10 % of gdp and imports 16 %, as well as in japan, where exports and imports of goods and services amount to 15 % and 13. 4 % of gdp, respectively. probably less well - known is, however, that the euro area is also more open than the united states and japan regarding the financial linkages. such linkages can be measured with different indicators. as i would like to highlight long - term trends, i will focus here mainly on stock data, given that flow data tend to be very volatile and usually reflect cyclical patterns in the short run. five main observations can be derived from cross - country comparisons of international investment positions. 6 first, comparative data highlight the financial openness of the euro area, thus contradicting any notion that this region is inward - looking when it comes to financial integration. the external assets and liabilities of the euro area account for a large share of gdp, around 124 % and 137 %, respectively. by comparison, in the united states, the corresponding numbers are substantially lower : 90 % for assets and 110 % for liabilities. in japan, foreign financial assets are likewise significantly lower than in the euro area ( 94 % of gdp in 2005 ), and the difference is even stronger for liabilities, which represent only 60 % of gdp, i. e. less than half of the corresponding figure for the euro area. second, it is interesting to observe that the advent of the euro seems to have significantly contributed to the process of opening up euro area financial markets. the euro area has indeed become progressively more open since 1999. on the assets side, stocks of euro area assets held abroad have increased from less than 87 % in 1999 to, as mentioned, over 124 % in 2005. on the liabilities side, the increase was also very substantial, from around 92 % to 137 %. the rise has actually been much less pronounced for the united states during the same period : us assets grew from 80 % of gdp in 1999 to 90 % today, and us liabilities increased from 91 % to 110 % of gdp. in other words, the euro area and the united states held roughly comparable assets and liabilities in 1999, but the euro area witnessed a more substantial increase since the start of economic and monetary union. third, the euro area appears to be a very important player in