as follows : if we can identify bubbles quickly and accurately, are reasonably confident that tighter policy would materially check their expansion, and believe that severe market corrections have significant non - linear adverse effects on the economy, then extra action may well be merited. but if even one of these tough conditions is not met, then extra action would be more likely to lead to worse macroeconomic performance over time than that achievable with conventional policies that deal expeditiously with the effects of the unwinding of the bubbles when they occur. for my part, i am dubious that any central banker knows enough about the economy to overcome these hurdles. however, i would not want to rule out the possibility that in some circumstances, or perhaps at some point in the future when our understanding of asset markets and the economy has increased, such a course of action would be appropriate. asymmetries and moral hazard proponents of extra action have their own bones to pick with the conventional strategy, especially as it relates to the alleged asymmetric nature of the policy's response to asset market booms and busts. in particular, the claim is often made that, based on the fomc's actions over the past twenty years, the fed actively works to support the economy in an event of a sharp decline in asset markets but does little or nothing to restrain markets when prices are rising, thereby creating moral hazard problems. this argument strikes me as a misreading of history. u. s. monetary policy has responded symmetrically to the implications of asset - price movements for actual and projected developments in output and inflation, consistent with its mandate. the most convincing evidence for this statement can be found in the results : interest rates have been consistent with underlying inflation remaining reasonably stable for some time now, accompanied by relatively mild fluctuations in real activity. 7 conventional policy as practiced by the federal reserve has not insulated investors from downside risk. whatever might have once been thought about the existence of a " greenspan put, " stock market investors could not have endured the experience of the last five years in the united states and concluded that they were hedged on the downside by asymmetric monetary policy. nor, for that matter, should they have concluded that the federal reserve does not act on the upside : if asset prices had been more closely aligned with fundamentals in the late 1990s, our policy would almost certainly have been easier, all else equal, because aggregate demand would have been weaker and hence

firms a false sense of security. reductions in credit risk may not be as great as perceived. the studies point to ways in which individual firms can make collateral programs more effective. first and foremost, the studies emphasize that collateral is a complement to credit analysis ; it is not a substitute for credit analysis. supervisors observed that some firms accepted counterparties that were unwilling to provide information about their risk profile as long as they were willing to post collateral. the fallacy of that approach was vividly demonstrated. positions may rapidly change in value, creating uncollateralized credit exposures to counterparties of unknown creditworthiness. a main point of these studies was the need for counterparties both to recognize the potential for unsecured exposures to arise in the future and to measure such exposures more carefully. a second theme in the studies was the need for counterparties to recognize that, although collateral programs mitigate credit risk, they also introduce operational, liquidity, and legal risks. to realize the benefits of the collateral program, back office systems must be very robust. that is, counterparties must be able to value portfolios, track collateral posted, call for any deficiencies, and verify the timely receipt of collateral. various studies have noted that firms relying on collateral programs must establish rigorous controls and devote sufficient resources to them. additional liquidity and legal risks also arise with collateral programs. counterparties entering into collateral agreements must ensure that they themselves can deliver collateral in a timely fashion, and the extensive legal documents related to the program must be enforceable in relevant jurisdictions. clearing. a device used to mitigate credit risk among groups of participants in many financial markets is a clearinghouse. a clearinghouse typically substitutes itself as central counterparty to all transactions that its members agree to submit for clearing. the creditworthiness of the clearinghouse is thus substituted for that of its members. the clearinghouse assumes the responsibility for managing credit risk through financial safeguards such as membership standards, capital requirements, and collateral systems. the clearing of otc derivatives is quite limited. some clearing of otc products has been conducted in sweden for several years. last year, the london clearing house ( lch ) began offering such services more broadly, but volumes to date have been limited. in the united states, the clearing of otc derivatives has been hampered by legal uncertainty associated with the possible application of the commodity exchange act. if the recommendations in the report of the president ’ s working group are implemented, this uncertainty will