In short, the Fed’s supervisory powers help both to give it a voice in policy discussions concerning financial stability and to increase the quality of its contributions to those discussions. With strong private-sector institutions and good public policies in place, episodes of severe financial stress should be relatively infrequent.
When financial problems do develop, however, the Fed and other policymakers face the important threshold question of whether public action is warranted; in particular, they must weigh the expected benefits of taking action against the possibility that such action will encourage excessive private risk-taking in the future (the moral hazard problem).