I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation.
The Fed's organization reflects a long-standing desire in American history to ensure that power over our nation's monetary policy and financial system is not concentrated in a few hands, whether in Washington or in high finance or in any single group or constituency.
My own experience is that the best outcomes are reached when opposing viewpoints are clearly and strongly presented before decisions are made.
Congress created Fannie Mae in 1938 and Freddie Mac in 1970. For many years, these institutions prudently pursued their core mission of enhancing the availability of credit for housing.
A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements. But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities.
The United States has never prioritized or failed to pay any obligation when due during a debt limit impasse. Despite the institutional risks and the lack of clear legal authority, we assume that Treasury will attempt to prioritize payments in a last-ditch effort to avoid default.
We live in a world defined by the rapid pace of technological change.
Real short- and long-term rates were relatively high in the late-1990s, so financial excess can also arise without a low-rate environment.
The Federal Reserve places great importance on our relations with the Bundesbank. Few such relationships have been as important, over the decades, in promoting financial stability and prosperity around the world.
If investors avoid the Treasury market, we could be unable to pay off maturing securities, which would mean an immediate default. Market participants generally agree that even a brief default would create potentially catastrophic risks to the financial system, like the meltdown of 2008.
Higher capital requirements increase bank costs, and at least some of those costs will be passed along to bank customers and shareholders. But in the longer term, stronger prudential requirements for large banking firms will produce more sustainable credit availability and economic growth.
We need a system that provides mortgage credit in good times and bad to a broad range of creditworthy borrowers.
It is quite plausible that the process of increased fragmentation of production across borders is subject to 'diminishing returns' and has its natural limits.
The Federal Reserve is committed to fulfilling our statutory mandate of stable prices and maximum employment.
Bailouts may have been more tolerable in the early 1990s when they were rare and their use for a failing bank was uncertain. That is no longer the case.
We do take seriously our obligation to assess whether our reforms are achieving their desired effects without imposing unnecessary burden.
The Government Securities Act gave the Treasury Department some rulemaking authority over all government securities brokers and dealers. But the act also required these firms to register with the SEC.
Regulatory changes have forced banks to closely examine their liquidity planning and to internalize the costs of liquidity provision. The costs of committed liquidity facilities will be passed on to clearing members. These costs are perhaps highest in clearing Treasury securities, where liquidity needs can be especially large.
There is clear empirical evidence that the response of EME financial markets to different shocks, including changes in U.S. interest rates, depends importantly on the state of economic fundamentals in the EMEs themselves.
It is worth noting that 'too big to fail' is not simply about size. A big institution is 'too big' when there is an expectation that government will do whatever it takes to rescue that institution from failure, thus bestowing an effective risk premium subsidy. Reforms to end 'too big to fail' must address the causes of this expectation.
Loss-absorbing capacity among banks is substantially higher as a result of both regulatory requirements and stress testing exercises.
No single housing finance institution should be too big to fail.
The question of how to structure our nation's financial system arose in the early years of the republic.
We need a resilient, well-capitalized, well-regulated financial system that is strong enough to withstand even severe shocks and support economic growth by lending through the economic cycle.
Liquidity problems can occur in central clearing, even if all counterparties have the financial resources to meet their obligations, if they are unable to convert those resources into cash quickly enough.
The financial crisis revealed important weaknesses in many areas of our financial system.
In a world of global trade and integrated capital markets, it is natural for economic and financial shocks and policy actions to be transmitted across borders.
The only way to ensure that inflation expectations remain safely anchored near the FOMC's target is to keep inflation close to that target on a consistent basis.
In normal times, at the beginning of each month, the federal government makes a cash advance to the Social Security Trust Fund called the 'normalized tax transfer,' in an amount equal to the estimated payroll taxes for the coming month.
Emerging market economies have long grappled with the challenges posed by large and volatile cross-border capital flows.
The financial crisis involved significant failures in the functioning, regulation, and supervision of OTC derivatives markets.
The Federal Reserve and other central banks have adopted broad public policy objectives to guide the development and oversight of the payments system. At the Fed, we have identified efficiency and safety as our most fundamental objectives, as set forth in our Policy on Payment System Risk.
My colleagues on the Board of Governors and I understand the value of having a diverse financial system that includes a large and vibrant contingent of community banks.
The sale of Treasury bonds, notes, and bills finances the U.S. government, and those securities are, in turn, a primary vehicle for savings for a wide range of U.S. households. Treasury securities are also an important source of collateral within the financial system.
The financial crisis and the Great Recession posed the most significant macroeconomic challenges for the United States in a half-century, leaving behind high unemployment and below-target inflation and calling for highly accommodative monetary policies.
Increased fragmentation of production across international borders - a natural outgrowth of the gains from specialization - meant more trade for any given value of final production, thus adding to the major expansion in gross trade flows in the 1990s and 2000s.
The banking industry has traditionally been characterized by physical branches, privileged access to financial data, and distinct expertise in analyzing such data.
If the public understands the central bank's views on the economy and monetary policy, then households and businesses will take those views into account in making their spending and investment plans; policy will be more effective as a result.
Risk management systems and controls may discourage or limit certain revenue-generating opportunities. Failure to ensure the independence of these functions from the revenue generators and risk takers has been shown to be dangerous, and this is something for which the board is accountable.
There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets, a balance that must be constantly weighed.
The TMPG is the place where market participants recognize and address their responsibilities to each other.
The longer workers are unemployed, the greater the likelihood that their skills will erode and workers will lose attachment to the labor force, permanently damaging the economy's dynamism and potential output.
More regulation is not the best answer to every problem.
AIG's failure revealed systemic problems in the OTC derivatives market that went well beyond the failure of a single market participant.
Below-target inflation increases the real value of debts owed by households and businesses and reduces the ability of central banks to respond to downturns.
The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace.
Against this backdrop of technological change and heightened expectations, it is worth remembering our broad public policy objectives, which are driven by the fundamental importance of the payments system in our society.
By fostering the economic health and vitality of local communities throughout the country, community banks play a central role in our national economy. One important aspect of that role is to serve as a primary source of credit for the small businesses that are responsible for creating a substantial proportion of all new jobs.
By purchasing and holding large amounts of Treasury securities and MBS, we put additional downward pressure on term premiums and so on long-term rates.
