Unfortunately, that long period of innovation and heightened financial activity exploded into an unsustainable credit boom that was marked by a failure to appropriately evaluate risks in lending to households and businesses, excessive leverage by both borrowers and lenders, and increased reliance on complex and opaque financial instruments that were poorly understood and fragile under stress.
The resulting financial strains and severity of their effects on real activity have clearly shown the limits of our ability to anticipate how and where problems in the financial sector would emerge and of our understanding of the channels through which the financial stresses could lead to a broad-based pullback in lending and adverse spillovers into the real economy.