timothy f geithner : restoring market liquidity in a financial crisis welcoming remarks by mr timothy f geithner, president and chief executive officer of the federal reserve bank of new york, at the second new york fed - princeton university liquidity conference, new york, 13 december 2007. * * * welcome to the new york fed and to this conference on liquidity. you are addressing some of the most important issues affecting financial markets today. your timing is good, perhaps too good. we are all going to need some time and perspective before we will know enough to draw conclusions and recommendations from the events of the past six months. the conditions that led to this crisis took a long time to develop and they will take some time to resolve. i think it is appropriate, though, that as central banks act to address the challenges in markets today, we also begin to define the agenda for future research and policy. on december 12, the federal reserve and several other major central banks, announced a series of actions in response to the elevated pressures in funding markets. together, these actions provide a more flexible and potentially more effective set of instruments, alongside our conventional monetary policy instruments, to help mitigate the risks that liquidity pressures in markets going forward could pose to the broader economy. with this framework of tools, we have the capacity to calibrate our response as market conditions change. although the specifics vary across central banks, the approaches outlined have several important common elements. we each have taken actions to provide more financing at terms longer than overnight. we each have chosen to auction funding against a broader range of collateral, collateral other than government securities, and in our case with a broader set of counterparties. and we have activated swap lines to help the relevant central banks provide liquidity in dollars in their markets. the initial spark to the pressures we observe in markets today was the sharp deterioration in the value of nonprime mortgage securities and the resulting increase in uncertainty about the value of a much larger amount of financial assets exposed to that risk. this was magnified by a substantial increase in uncertainty about the economic outlook and the consequences of that uncertainty for asset values and credit losses. financial institutions faced a sharp drop in demand for a range of assets, impairing the securitization market as a source of funding. and a substantial amount of these illiquid assets were held in vehicles with implicit or explicit liquidity guarantees provided by banks. this produced a large unexpected increase in demand for funding

measures were unthinkable four years ago. today, euro area heads of states or government agreed in brussels to move towards a stronger economic union. this implies measures in two directions, namely : a new fiscal compact and strengthened economic policy coordination and the development of the euro area stabilisation tools to face short term challenges. in the view of the ecb ’ s governing council, a new fiscal compact comprising a fundamental restatement of the fiscal rules, together with the fiscal commitments that euro area governments have made, is the most important precondition for restoring the normal functioning of financial markets. to accompany fiscal consolidation, bold and ambitious structural reforms are essential. they should be immediately carried out to help the euro area countries improve competitiveness, increase the flexibility of their economies and enhance their longer - term growth potential. we at the ecb take our responsibilities. monetary policy in the euro area will remain dedicated to our mandate, which is to maintain price stability over the medium term. the policy measures taken by the ecb have resulted in the governing council ’ s outstanding bis central bankers ’ speeches record during the past 13 years in terms of price stability and anchoring of inflation expectations. the ecb will continue to remain an anchor of confidence and stability, in a global economy characterised by marked uncertainties. this is the central contribution we can make to foster sustainable growth, job creation and financial stability in the euro area as whole. thank you for your attention and i wish you all a fruitful and enriching conference. bis central bankers ’ speeches