In markets in which all participants’ rights as issuers, obligors, creditors, and owners are justly supported and all are granted free and equal access to generate financial arbitrage transactions that are riskless, subject to:

• Adequate constraints against fraud,
• Anonymous and timely reporting of trades, and
• Requirements to fairly state their financial condition,

financial stability will be established by supply and demand at a price that represents the minimum sustainable cost of intermediation.

When market prices or spreads for credit establish that one or more of the conditions for sustained financial stability cannot be achieved effectively by private-sector participants, monetary authorities should undertake such transactions as are necessary and consistent with their mandates to minimize the cost of intermediation while encouraging steps to regain a level of private-sector participation that allows monetary authorities to suspend such transactions and unwind positions previously acquired. The actions by the Federal Reserve since 2008 that are illustrated in Part One of this book provide an excellent case in point. Likewise, when legal rights are not aligned correctly, political authorities should act as needed to correct defects in market regulation while avoiding the creation of market control.