THE ST. LOUIS FED TRADITIONALLY ANCHORS ITS ANNUAL REORT WITH AN ESSAY ON A TOPIC THAT’S IMPORTANT TO THOSE WHO CARE ABOUT OUR NATION’S ECONOMY. This year is no exception. The subject is financial stability—always worth talking about but particularly timely now, what with the shocks that we’ve endured of late: terrorist attacks, war, accounting scandals and volatile markets, to name a few.

Although our financial system has weathered these storms—and many more before them—we’d be wise to keep in mind the oft-stated warning: Past performance is no guarantee of future results. The steps we took to protect our credit and payment mechanisms during the latest wave of crises may not apply in the future. Different problems require different solutions. We should start thinking about these problems and solutions now—before some vulnerability surfaces out of the blue and bites us. A few of the threats to our financial system are very well-known, such as the funding shortages facing Social Security and Medicare. Others are beginning to catch the public’s eye, such as the troubling dominance of the home mortgage market by Fannie Mae and Freddie Mac. If either of these giants were to stumble, the entire housing market would fall into disarray. Other possible threats may be harder to get a handle on, but we must still try.

For those who think the protectors of our financial system will always prevail, this essay will provide a reminder of when the United States had a reputation for financial instability. Looking today at Japan, one can see that such instability can recur, even in a country that has a long-term track record of stability like ours.

We hope that this essay spurs discussion about the vital need for vigilance on the subject of financial stability.

Elsewhere in this report, we summarize our year—a good one for the St. Louis Fed, in almost all regards. This book also contains a new section, called “By the Numbers.” Through important, unusual or just interesting numbers, we will tell you a bit more about who we are at the St. Louis Fed and what we do. I hope you enjoy it.

William Poole

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