volatile, is about unchanged from midjune levels. in the corporate bond market, spreads have widened somewhat, but current levels are close to historic averages, and issuance of investment - grade bonds has been quite sizable. issuance of speculative - grade bonds has been sharply reduced, but aside from difficulties of lbo - related deals, this may reflect issuers'willingness to await improved conditions. not unlike prior episodes, it seems increasingly apparent that many investors and financial intermediaries became so content with the benign economic conditions and robust financial markets that they tended to act with confidence greater than warranted by the fundamentals. indeed, some may have overly relied on credit ratings as sole gatekeepers for evaluating risks. so perhaps, in some sense, markets can become too liquid. in this case, markets may appear to function smoothly, but the risk - based pricing that lies at the heart of how financial markets efficiently allocate capital is impaired. the gloss of confidence may cause a misallocation of resources, and investors and financial intermediaries can be sidelined for a time, undermining the normal functioning of market operations. conclusion some months ago, i asked, " what happens when liquidity falters? " 8 highlighting the risks of a liquidity shock at some indeterminate point in the future is easier than ascertaining the consequences with precision. reduced liquidity conditions in markets today stem from a pullback in investors'willingness to take risks, which may have been triggered, but i argue not caused, by losses in subprime - mortgage markets. thus, a broader reassessment of risk positions appears at work, especially for products that are opaque or complex. investors who had relied on credit ratings alone are now confronted with having to perform their own credit and market valuations. some may now find they are not well - equipped to make these evaluations. how quickly markets normalize may depend on the speed with which investors and counterparties gain comfort in their abilities to value assets. the adjustment process by private investors has increased the risk that banks may increasingly be called upon as backup providers of funding. the federal reserve responded to these developments by providing reserves to the banking system ; it announced a cut in the discount rate of 50 basis points and adjustments to the reserve banks'usual discount window practices to facilitate the provision of term financing. in addition, earlier this week, the fomc lowered its target for the federal funds rate by 50 basis points. the

kevin m warsh : financial market developments remarks by mr kevin m warsh, member of the board of governors of the us federal reserve system, to the state university of new york at albany ’ s school of business, albany, new york, 21 september 2007. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * it is good to be back in upstate new york. thank you to the school of business of the university of albany for inviting me. i am particularly heartened to see old friends, new students, and prominent business leaders in attendance. i played in the new york state public high school tennis championships on the other side of this campus, so this is certainly familiar terrain. however, i hope to perform better in my remarks today than i did with my racquet twenty years ago. i have been honored to serve in washington, d. c. for the past 5 - 1 / 2 years. my knowledge of the economy has deepened by working with my colleagues to put fiscal and monetary policy into practice. nonetheless, with each passing day, it is more obvious that i learned much of what i need to know about the real economy in my first eighteen years here in upstate new york. the current period of heightened financial market volatility has drawn more attention than usual to the policy actions of the federal reserve. returning home at this time serves as a useful reminder that the decisions we make in washington matter on the front lines of the real economy. our monetary tools, for example, affect the ability of aspiring homeowners to take out a first mortgage. they also matter to retirees on fixed budgets, who are vulnerable to escalating prices, and to graduates of this and other universities looking for jobs. our supervision and regulatory policies, to cite another example, matter to businesses, large and small, looking to borrow from banks to expand their operations. on the federal open market committee ( fomc ), my colleagues and i seek to deploy our monetary policy tools to help keep the u. s. economy on an even keel. 1 we try to provide the right mix of policy prescriptions, patience, and perspective to counter possible adverse developments. in evaluating the state of the u. s. economy, its prospects, and the current stance of policy, we typically turn to such arcana from the economics textbooks as the term structure of interest rates, the shape of the phillips curve