another, and with each institution it ate, it grew bigger and stronger. we had just watched it eat lehman. we could not stop it there because we are only authorized to lend against collateral, and lehman did not have enough collateral. now it was focused on aig. unlike the situation with lehman brothers, we were presented with an action we could take, a loan we could make to avoid the collapse of aig. our knowledge of the company was limited because we had never supervised aig, but the loan could be secured with collateral. based on our assessments of the collateral, we believed the risk of the loans to be limited. and while the risk of making the loan was limited, the risk of not making the loan – of letting aig, which was significantly larger than lehman, fail – was certain to be huge. and no other entity – not a private company, not a consortium of private companies acting together, not any other branch or agency of the government – was in a position to do anything. the clock was ticking, and default was imminent. there was no time to gather more information or find another solution. so i ask you, what would you have done? it was in this context that the federal reserve, with the full support of the treasury, made a loan to aig to prevent its failure. the loan imposed tough terms, senior management was replaced, and shareholders lost almost all of their investments. if i had to cast that vote again, even knowing all that followed, including the criticism that we have received, i wouldn ’ t change it. i still believe that the consequences would have been far worse for all businesses and consumers if we had let aig fail. despite the claims by some that healthier wall street firms or even the small businesses and consumers on main street did not benefit from assistance to aig, i would argue that no business or individual was immune to the effects of a sequential collapse of key financial intermediaries. as it was, we still had frozen credit markets that necessitated the facilities i discussed earlier. in the wake of the lehman failure and the near failure of aig, it was as if someone turned off a switch on business activity. almost overnight, businesses went into full protection mode, halting all capital expenditures, shedding inventory, and slashing expenses. in the face of massive unemployment caused by layoffs and business failures, consumers stopped spending. this first became clear to me during the october 2008 board of directors meeting at the

mr. greenspan presents the views of the federal reserve in its semi - annual report on monetary policy testimony of the chairman of the board of governors of the federal reserve system, mr. alan greenspan, before the senate banking committee on 26 / 2 / 97. i appreciate the opportunity to appear before this committee to present the federal reserve ’ s semiannual report on monetary policy. the performance of the u. s. economy over the past year has been quite favorable. real gdp growth has picked up to more than three percent over the four quarters of 1996, as the economy progressed through its sixth year of expansion. employers added more than two - and - a - half million workers to their payrolls in 1996, and the unemployment rate fell further. nominal wages and salaries have increased faster than prices, meaning workers have gained ground in real terms, reflecting the benefits of rising productivity. outside the food and energy sectors, increases in consumer prices actually have continued to edge lower, with core cpi inflation only 2½ percent over the past twelve months. low inflation last year was both a symptom and a cause of the good economy. it was symptomatic of the balance and solidity of the expansion and the evident absence of major strains on resources. at the same time, continued low levels of inflation and inflation expectations have been a key support for healthy economic performance. they have helped to create a financial and economic environment conducive to strong capital spending and longer - range planning generally, and so to sustained economic expansion. consequently, the federal open market committee ( fomc ) believes it is crucial to keep inflation contained in the near term and ultimately to move toward price stability. looking ahead, the members of the fomc expect inflation to remain low and the economy to grow appreciably further. however, as i shall be discussing, the unusually good inflation performance of recent years seems to owe in large part to some temporary factors, of uncertain longevity. thus, the fomc continues to see the distribution of inflation risks skewed to the upside and must remain especially alert to the possible emergence of imbalances in financial and product markets that ultimately could endanger the maintenance of the low - inflation environment. sustainable economic expansion for 1997 and beyond depends on it. for some, the benign inflation outcome of 1996 might be considered surprising, as resource utilization rates - - particularly of labor - - were in the neighborhood of those that historically have been associated with building inflation pressures.