, i believe this is likely to prove difficult to do in practice. each of the regulatory agencies guards its own authority and prerogatives, and may not always be responsive to pressure from other regulators or the u. s. treasury. there is also the problem of responding to an emerging financial stability risk in a timely manner. first, the emerging problem needs to be identified. then alternative policy responses need to be analyzed and debated. and, there is an understandable bias to start small and to escalate only as needed given the lack of understanding about how big an impact a particular tool may have on the economy. so, even if the fsoc could be effective in developing a consensus among the regulators, i wonder whether it could do this in a timely way. the housing boom in the u. s. that culminated in the financial crisis began in 2002 and 2003. by the time that it was broadly identified as an issue in 2005 and 2006, it might have been too late to do much to temper its effects, even with a sound macroprudential response by the regulatory community. in the remainder of my time, i will discuss two topics in more detail. first, i will discuss briefly what we learned at tabletop exercise with a number of federal reserve bank presidents concerning the potential use of macroprudential tools in response to sectoral imbalances. i think the tabletop exercise underscores the difficulty of using macroprudential tools in practice in the united states. second, i will discuss the issue that adam posen has raised – whether we should focus on the use of rules that are hardwired into the financial system ex ante or instead favor using macroprudential tools in a more discretionary, ex post basis, once particular problems have been identified. in the tabletop exercise, the five federal reserve bank presidents who are members of the subcommittee on financial stability of the conference of presidents discussed the best way to respond to a scenario in which the commercial real estate market was overheating. 2 the scenario was much more detailed than that, but the commercial real estate sector was the major problem with respect to financial stability. the stated goal of the exercise was to reduce the risk posed by the commercial real estate boom to financial stability and, by extension, to the federal reserve ’ s ability to achieve its macroeconomic objectives of maximum sustainable employment and price stability. prudential tools under consideration included : see macroprudential policy : case study

william c dudley : the longer - term challenges ahead remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the council of society business economists annual dinner, london, 11 march 2010. * * * thank you for giving me the opportunity to speak here today. as always, my remarks reflect my own views and are not necessarily reflective of the views of the federal open market committee ( fomc ) or the federal reserve system. as we emerge from a deep and protracted global recession and terrifying financial crisis, we should count our blessings – the outcome could have been far worse. extraordinary interventions helped to keep the financial system from collapsing and large doses of fiscal and monetary policy stimulus helped to put a floor under global demand, thereby preventing a full - blown depression. however, now that we are on a bit of firmer ground, it is even more important that we take stock and evaluate the challenges that still face us. how we respond will determine whether the path forward will be relatively smooth or instead will be more tortuous. i want to discuss three of these challenges today. the first challenge relates directly to the recent crisis : what needs to happen at the national and international levels to strengthen the financial system so that a crisis of this magnitude does not occur again. the second challenge relates to the set of fiscal exit strategies that would put fiscal policies around the world on a sustainable path. in many countries, including the united states, budget deficits have widened sharply and the level of public debt is growing faster than gross domestic product ( gdp ). this trend is unsustainable. the third challenge is how to rebalance global consumption and investment to support continued strong growth in the emerging world and a sustainable recovery elsewhere. in my view, sustainable global growth requires a shift toward a higher consumption share in the emerging world matched by a shift away from consumption in the united states. these three challenges are interlinked. without regulatory reform, we will not have the robust and resilient financial system that we need to match savers and borrowers around the world. without fiscal consolidation, financial market participants will balk at providing the funds needed to close the gap between government revenue and spending. in addition, without rebalancing the composition of global demand, long - run economic growth will likely be weaker. weaker long - run growth will lead to excessive unemployment and less government revenue, which, in turn, will make it more difficult to put fiscal