Although some nonlinearities are accounted for in our modeling exercises, we cannot be certain that our simulations provide reasonable approximations of the economy’s behavior in times of large idiosyncratic shocks. Recent history has also reinforced the perception that the relationships underlying the economy’s structure change over time in ways that are difficult to anticipate.
The financial turmoil presented difficult challenges that were not fully anticipated by either financial institutions or regulators, but firms did vary in how well they were able to deal with those challenges. By comparing how some key firms fared during the recent period, we can better understand what worked well and what did not work so well.