Easier policy should also support asset prices – or at least cushion declines that otherwise would have occurred. And expected policy easing likely contributed to the drop in the foreign exchange value of the dollar, which is bolstering our exports. The extent of the financial adjustment, as I mentioned previously, is itself highly dependent on how housing and the economy evolve.
Part of the rise in risk spreads, reduction in credit availability, and the declines in stock prices in the past few months reflect investor efforts to protect themselves against the potential for very adverse economic outcomes – that is, the exposures and losses that would accompany a persistent steep decline in house prices and a significant recession.