, those actions were necessary and justified under the circumstances that prevailed at that time. however, those events also have consequences that must be addressed. in particular, if no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of " too big to fail, " possibly resulting in excessive risk - taking and yet greater systemic risk in the future. mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system. as both the nation's central bank and a financial regulator, the federal reserve must be well prepared to make constructive contributions to the coming national debate on the future of the financial system and financial regulation. accordingly, we have set up a number of internal working groups, consisting of governors, reserve bank presidents, and staff, to study these and related issues. that work is ongoing, and i do not want to prejudge the outcomes. however, in the remainder of my remarks today i will raise, in a preliminary way, what i see as some promising approaches for reducing systemic risk. i will begin by discussing steps that are already under way to strengthen the financial infrastructure in a manner that should increase the resilience of our financial system. i will then turn to a discussion of regulatory and supervisory practice, with particular attention to whether a more comprehensive, systemwide perspective in financial supervision is warranted. for the most part, i will leave for another occasion the issues of broader structural and statutory change, such as those raised by the treasury's blueprint for regulatory reform. strengthening the financial infrastructure an effective means of increasing the resilience of the financial system is to strengthen its infrastructure. for my purposes today, i want to construe " financial infrastructure " very broadly, to include not only the " hardware " components of that infrastructure – the physical systems on which market participants rely for the quick and accurate execution, clearing, and settlement of transactions – but also the associated " software, " including the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction. of course, a robust financial infrastructure has many benefits even in normal times, including lower transactions costs and greater market liquidity. in periods of extreme stress, however, the quality of the see department of the treasury ( march 2008 ), blueprint for a modernized financial regulatory structure. financial infrastructure may prove critical.

lend to fannie mae and freddie mac, should that become necessary. any lending would be collateralized by u. s. government and federal agency securities. in general, healthy economic growth depends on well - functioning financial markets. consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the federal reserve. i turn now to current economic developments and prospects. the economy has continued to expand, but at a subdued pace. in the labor market, private payroll employment has declined this year, falling at an average pace of 94, 000 jobs per month through june. employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of other sectors are evident as well. the unemployment rate has risen and now stands at 5 - 1 / 2 percent. in the housing sector, activity continues to weaken. although sales of existing homes have been about unchanged this year, sales of new homes have continued to fall, and inventories of unsold new homes remain high. in response, homebuilders continue to scale back the pace of housing starts. home prices are falling, particularly in regions that experienced the largest price increases earlier this decade. the declines in home prices have contributed to the rising tide of foreclosures ; by adding to the stock of vacant homes for sale, these foreclosures have, in turn, intensified the downward pressure on home prices in some areas. personal consumption expenditures have advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes. in particular, with the labor market softening and consumer price inflation elevated, real earnings have been stagnant so far this year ; declining values of equities and houses have taken their toll on household balance sheets ; credit conditions have tightened ; and indicators of consumer sentiment have fallen sharply. more positively, the fiscal stimulus package is providing some timely support to household incomes. overall, consumption spending seems likely to be restrained over coming quarters. in the business sector, real outlays for equipment and software were about flat in the first quarter of the year, and construction of nonresidential structures slowed appreciably. in the second quarter, the available data suggest that business fixed investment appears to have expanded moderately. nevertheless, surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising costs of inputs and indications of tightening credit