The Fed provided liquidity facilities and took many other actions to contain and reduce pressures in financial markets, while the U.S. Treasury supported the banking system and provided cash and incentives to households, businesses, and state and local governments to support spending during 2009. The Fed’s “lender of last resort” interventions – including facilities such as the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), as well as programs such as reciprocal currency agreements – are examples of the rapid application of central banking tenets to the unique challenges we faced as this crisis evolved. Indeed, in many ways, the crisis has underscored why the Federal Reserve was created almost a century ago: to provide a backstop for a banking system prone to runs and financial panics. Where it proved necessary and feasible, the Fed also used its emergency lending authority to forestall the disorderly failure of systemically important institutions. These actions truly were extraordinary – well outside the scope of our normal operations – but our judgment was that not taking those actions would have risked a broader collapse of the financial system and a significantly deeper and more protracted recession. Faced with the choice between these otherwise unpalatable actions and a broader systemic collapse, the Fed, with the full support of the Treasury, invoked its emergency lending authority and prevented the collapse of certain institutions previously considered to have been outside the safety net. Make no mistake: these necessary moves were unprecedented and controversial.
There is an economic logic behind this argument, notably with regard to infrastructure. But it ignores the sad reality, which is that no country has sufficient credibility at present to implement this policy effectively. Decades of deficits have created a deep-seated scepticism. The current balance is very fragile and, in this highly volatile environment, any major deviation from the required fiscal path would probably be punished with a sharp rise in interest rates. Fifth assertion: within the banks, we need to separate those activities which serve to finance the economy from those that are purely speculative; and prevent customer deposits or central bank refinancing from being used to fuel dangerous behaviour. The idea  2  BIS central bankers’ speeches  in itself is a sound one. Unfortunately, it has often translated into an absurd cleavage between commercial banks (by that I mean lending banks) and investment banks. In fact, it is not possible to make a clear distinction between “good” lending and “evil” markets. What is important is that all participants in the real economy find the right combination of financing to suit their needs. And for that, nothing can rival the universal banking model which provides a one-stop shop for a full range of banking products. III/- I’d like to look now at my own proposals for how we can reduce the uncertainty surrounding the financial sector.