Properly managed, central counterparties can mitigate the counterparty risk that has proved a source of contagion in the past year. The Federal Reserve's efforts in conjunction with other agencies to prevent the failure of systemically important firms have been controversial at times.
One view holds that intervening to prevent the failure of a financial firm is counterproductive, because it leads to erosion of market discipline and creates moral hazard. As a general matter, I agree that preserving market discipline is extremely important, and, accordingly, the government should intervene in markets only in exceptional circumstances.