Old sayings often contain wisdom. I like the one that says, ―An ounce of prevention is worth a pound of cure.‖ Actually, I think it should be quite a few pounds of cure.
Prevention can take many forms. No doubt, the most important, from the standpoint of the topic of this conference, is learning how to prevent the need for crisis-driven intervention in financial markets by the government. That is partly an issue involving financial institutions and the way they work, partly one addressing the markets themselves, and partly developing procedures and guidelines for the appropriate actions of government policy makers in the future. I look forward to learning more about these issues today, starting in the first session on the crisis in credit markets and then on to interventions in particular financial institutions -- Freddie, Fannie, and Bear Stearns – and finally in the session on the lessons learned for the next steps and future reforms. I thank you all for coming, To get us started I’ll 2 say a little about all these issues, staring with how I see the reasons for the current turmoil and my initial reflections on the implications of what has been done.
The effort to identify the sources of the problem can easily lead us into staggering complexity, but there is also a simplicity to it.
People and institutions behave more responsibly when they have some of their own equity at stake. This situation emerged in such a way that this principle became virtually inoperative. In an effort to make housing more affordable, financial wizards with the implicit backing of the federal government, figured out how to give away houses: no down payments and easy terms. When you give something away, demand rises rapidly and so do prices, so rapidly rising prices made the easy terms look reasonable and seemed to validate them
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