, complex organizations, this is an exceedingly difficult task and much more so than when i spoke about it 15 years ago. this crisis, in fact, confirms that even the senior management, boards, and financial experts at our largest banks failed to assess adequately the risks they were taking, even though they were involved with such issues on a constant basis and had their reputations at stake. also, as i previously stated, the substantial incentives that large organizations have to take on more risk, with the government expected to pick up the losses should they incur, unfailingly lead to undue risks throughout the balance sheet. in the hands of any banker, the combination of competitive pressures and perverse incentives are almost certain to result in noticeably higher risk exposures. against these odds, we cannot expect examiners to have a 100 percent success rate. factoring in the political power of the largest institutions, we cannot expect even a modest success rate during the upswing in the cycle. higher capital standards. i also support stronger capital standards, especially in the form of a maximum leverage ratio based on equity capital. basel iii and the dodd - frank counter cyclical capital provisions may provide some constraint on excess risk in firms if they are implemented successfully. but again, we must be cautious in what we can expect from this step by itself. basel i and ii were supposed to provide a better means for linking a bank ’ s capital to the amount of risk it assumed. along the way, we found that risk was very difficult to measure and that capital needs determined during normal circumstances were not enough for tail events or shocks that create financial crises. it is a fact that the largest financial firms easily met their risk based capital requirements just prior to this crisis. in addition, too big to fail incentives have provided an irresistible motive for large banks to game any capital system, particularly since their uninsured creditors do not count on capital but on a bailout for protection. there were several notable signs of this “ gaming ” of capital standards leading up to the crisis, including the growth of off - balance sheet activities and the construction of subprime mortgage - backed instruments that marginally met the standards for aaa credit ratings. even with firmer leverage standards, the incentive is for these organizations to increase balance sheet risks. resolution policy for too - big - to - fail institutions : a third option is to establish a framework for resolving systemically important institutions. i would add that this framework – to be successful – must convince

, we would need to make such a change slowly but systematically. allowing maturing mortgage backed securities to roll off, the federal reserve ’ s balance sheet would shrink gradually, with relatively small consequences for financial markets. second, we should take the first early steps to normalize interest rate policy. this is not a call for high rates but a call for non - zero rates. in 2003 the fomc delayed our efforts to raise rates. in that period we reduced the federal funds rate to 1 percent and committed to keeping it there for a considerable period. this policy fostered conditions that let to rapid credit growth, financial imbalances and the eventual financial collapse from which we are still recovering. had we been more forceful in our action to renormalize policy then, it ’ s likely we might have suffered far less in 2008 through 2010. also, any effort to renormalize policy would include signaling a clear intention to remove the commitment to maintain the federal funds rate at 0 to ¼ percent “ for an extended period ”. as the public adjusts to this, we should then turn to determining the pace at which we return the funds rate to 1 percent. once there, we should pause, assess and determine what additional adjustment might be warranted. a 1 percent federal funds rate is extremely accommodative, but from that point we could better judge the workings of the interbank and lending markets and determine the order of policy actions that would support sustained long - term growth. other concerns regarding zero rates these are difficult times, no doubt, and it is tempting to think that zero interest rates can spark a quick recovery. however, we should not ignore the possible unintended consequences of such actions. zero rates distort market functioning, including the interbank money and credit markets ; zero rates lead to a search for yield and, ultimately, the mispricing of risk ; zero rates subsidize borrowers at the expense of savers. finally, it is important to note, that business contacts continue to tell me that interest rates are not the pressing issue. rather, they are concerned with uncertainties around our tax structure ; they are desperate to see this matter settled. they need time to work through the recent healthcare changes ; and they are quite uncertain about how our unsustainable fiscal policy will be addressed. they are insistent that as these matters are addressed, they will once again invest and hire. qe2 cannot offset the fundamental factors that continue to