in his pockets as a reward for his foresight and progressive thinking. for similar reasons, many will have more difficulty waiting for better times. of course, it is far from inconceivable that strong gusts of wind could come from any direction, dispersing pitch - black storm clouds in a moment ’ s time, bringing leveraged buyouts of heavily indebted companies under the aegis of credit institutions offering minimum terms and slick collateral, and bright, sunny morning would smile on markets in iceland and elsewhere. but even though this is not inconceivable, and though history shows that the market is living proof of the most improbable outcomes, the likelihood is that the probability of winning the wait - and - hope game is measurably poorer than that accompanying the purchase of a lotto ticket. therefore, it is appropriate to assume that the situation will not right itself very much in the short term, and if it does right itself to any measurable degree, it will hardly return to its prior state. if people haven ’ t prepared themselves already, there is no reason to wait. we must seek all possible ways to strengthen the liquidity position of companies – particularly financial companies – and at the same time we must re - examine market models. in athletic terms, one could say that this means that now is the time to consolidate our defences and be content with a goal if opportunities emerge in spite of all odds. though exaggerated pessimism is obviously unnecessary, it is as bad or worse to paint the situation in rosy colours for the benefit of ourselves and the public and imply that there is some sort of magical solution to the problem that faces us. as the saying goes, “ lying to others is a wicked bent ; lying to oneself breeds a lethal event. ” the fact that the past few months have seen dubious conduct in the international markets is another matter altogether. recent examples include a rumourmongering campaign against the british bank hbos, causing substantial, though temporary, damage. that case is now being investigated. there is also an example from ireland, which suggests that the same took place there. and it cannot be denied that the attacks that have been made on iceland ’ s bank and central government – which was subjected to cds spreads of up to an absurd 400 basis points – give off an unpleasant odour of unscrupulous dealers who have decided to make a last stab at breaking down the icelandic financial system. they won ’

and lending standards on business loans. in addition, market reports indicated that the capital markets were seizing up as dealers and other marketmakers recoiled from risk taking. in response, the federal open market committee ( fomc ) lowered its target for the federal funds rate 75 basis points in three equal steps and maintained the lower rate through june of the subsequent year. this response mainly reflected fomc concerns that these financial instabilities had either signaled or created significant downside risks to the economic outlook, particularly for business investment. the fomc's significant aversion to the possible negative outcomes associated with these risks was part of a risk - management perspective - - that is, that the economic recovery from a financial shock could be more difficult to manage than the financial shock itself. as for events after 1998, it is more difficult to identify a " pure " financial crisis. the devastating terrorist attacks in 2001 caused tragic loss of life and major damage to the physical infrastructure of a number of key firms central to trading and market - making activities. although there were many important differences, this crisis mimicked a financial meltdown in the sense that important financial markets could not operate because of the cessation of activities by some firms. the federal reserve responded in a manner that was appropriate to the nature of the crisis. we issued a statement that we were up and running and ready, if needed, to extend loans from the discount window. depository institutions took up the offer ; their borrowing surged to more than $ 45 billion but dropped quickly after a few days. we also worked jointly with foreign central banks to provide funds to promote the smoother operation of foreign exchange transactions and established swap lines that channeled funds to institutions that needed dollars. in addition, the federal reserve took a variety of other actions, including waiving daylight overdraft fees, extending the operating hours for fedwire, and easing the limits on securities lending to reduce the pressure on firms requiring securities that were made scarce because of settlement difficulties. all these measures were taken quickly, maintained temporarily, and wound down in an orderly manner as the need for them receded. after the initial rush of activity, we focused on the nonfinancial economy. evidence of a weakening economy had already emerged before the terrorist attacks ; the decline in stock prices, the widening of risk spreads, and the impairment of market functioning created by the attacks caused many policymakers to worry that this weakening would accelerate. again reflecting the risk - management perspective i described earlier