Volatility is generally a friend, not a foe, of market functioning. It should not be treated as an externality from which we suffer. Volatility, absent destabilizing moves, should be allowed to effectuate change in the financial architecture of private markets. Only then, I suspect, will a more robust recovery in market liquidity, investor confidence, and real economic activity be achieved.

Consistent with our dual mandate of promoting maximum employment and stable prices, we also need to be alert to risks to price stability. Increases in food and energy prices have pushed up overall consumer prices and are putting upward pressure on core inflation and inflation expectations. We will continue to monitor the inflation situation closely. And, more broadly, in my view, as financial intermediation channels reset, monetary policy will become still more efficacious.

Fed policy--both with respect to liquidity tools and monetary policy--is partially offsetting the consequences of the liquidity and credit pullback on real activity. But we must be careful to not ask policy to do more than it is rightly capable of accomplishing. The problems afflicting our financial markets are indeed long-in-the-making. Correspondingly, the curative process is unlikely to be swift or smooth. Time is an oft-forgotten, yet equally essential, tool of our policy response.

If you've seen one financial crisis, you've seen one financial crisis ... This does appear to be different.

From Q&A as reported by Reuters

We have to find a better balance between market discipline and regulation in our financial system, a better balance between efficiency and innovation and reserves and stability.
...
The best defence is to make sure you get the incentives right so that financial institutions hold larger cushions, larger shock absorbers, in good times, against conditions of stress. Hard to do, complicated to figure out how to do it well - but that's the critical objective.

As reported by Reuters

In recent months, the Federal Reserve has been intensely focused on the continuing strains in financial markets. Healthy, well-functioning financial markets are essential to sustainable growth. In particular, much experience shows that economies cannot perform at their full potential when financial conditions are such as to restrict the supply of credit to sound borrowers. We are addressing these financial strains and their potential economic consequences with a number of tools, including the provision of extra liquidity to the system and reductions in our target for the federal funds rate.

The process of implementing the PWG's [President's Working Group's] implementations will be challenging, in no small measure because of the continuing pressures of short-term crisis management. However, we do not have the luxury of waiting for markets to stabilize before we think about the future. Indeed, many of the necessary changes that have been identified, including increasing transparency, improving risk management, and attaining better coordination among regulators, could provide important support to the process of normalizing our financial markets.

Given its focus on fundamental reform, the recommendations of the Treasury blueprint are mostly intended to be undertaken in the longer term. In that respect, it is an important first step, and we look forward to working with the Congress and others in developing a framework that modernizes our financial and regulatory architecture. The analysis of the PWG [President's Working Group] that I will be discussing today is more sharply focused on recent events, and its recommendations are intended to be part of the near-term and medium-term effort to restore more normal functioning of financial markets and to improve the operation of the current system.

More transparency about the risks and other characteristics of securitized credits on the part of their sponsors would obviously help. But more generally, investors must take responsibility for developing independent views of the risks of these instruments and not rely solely on credit ratings.

The interests of the financial system, the individual firms, are in some sense opposed to the interests of the broader economy.

From Q&A as reported by Reuters

We will not experience anything remotely like that in the United States today ... We are certainly going to make sure that the financial system remains in good functioning order.

From Q&A as reported by Market News International and Reuters, on comparisons to the Great Depression

Here is a simple analogy to help you think about our effort. The Federal Reserve is charged with conducting monetary policy that sustains noninflationary economic growth. We have at our disposal a tool called the federal funds rate, which we set as the base lending rate for the economy. Think of the fed funds rate as a monetary spigot, and the Fed’s goal is keeping the lawn of the economy green and healthy. If we turn the spigot up too forcefully, we will flood and kill the grass with inflation. If we provide too little, the lawn turns brown, starved for money. To get the money from the spigot to the lawn requires a working system of pipes and sprinkler heads. The “shadow banking system,” however, looks like a Rube Goldberg device designed by a hydrologist on acid, with pipes and conduits that lead every which way and not always toward the goal of sustainable economic growth. Moreover, the system of pipes and outlets is clogged with the muck and residue of a prolonged and frenetic period of unrestrained growth and abuse. Until the confusion and the debris are cleared away, financial intermediaries will be reluctant to book new loans or incur additional risk. This retards the impact of additional monetary accommodation.

Thus, even as we have been cutting the fed funds rate—even as we have been opening the monetary spigot—interest rates for private sector borrowers have not fallen correspondingly, and rates for some borrowers have increased. The grass is turning brown.

The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices.

As reported by Bloomberg News

What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.

...

The extension of lending directly to non-banking financial institutions -- while under the authority of nominally `temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil.

As reported by Bloomberg News

"Simply stated, the bright new financial system — for all its talented participants, for all its rich rewards — has failed the test of the market place.
... 

Mathematical modeling, drawing strong inferences from the past, has demonstrably failed to anticipate unexpected events of potentially seismic importance. ... Part of the problem, as I understand it, is that mathematical modeling simply cannot deal with markets where it is not random or physically determined events but human instincts that cause self-perpetuating waves of unwarranted optimism or pessimism.

As reported by Dow Jones Newswires

While improvements in both macroeconomic and microeconomic policies have helped to make some Latin American countries less vulnerable to outside shocks, the region is not decoupled from the United States and the rest of the world. As globalization has proceeded, Latin America is increasingly connected to the world through global capital flows and capital markets. Further improvements in both macroeconomic and microeconomic policies are imperative to maintain those flows and economic health, particularly in the face of global financial turbulence. One area that merits particular attention is enhancing the management of risk in financial institutions and markets in Latin America as well as emerging markets more generally.