william c dudley : securing the recovery and building for the future remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the united states military academy at west point, west point, new york, 17 november 2011. * * * i am honored to have the opportunity to speak to you today in the hallowed halls of west point. i do not need to tell anyone here of the long and distinguished tradition of this institution and the u. s. army. i believe that the u. s. military is one of our nation ’ s greatest institutions and a living demonstration of the best of america. your example of national service inspires us all to live up to our duty to do all we can to advance the national interest. i am the president of the federal reserve bank of new york, part of the federal reserve system that serves as our nation ’ s central bank. in this capacity i am also vice chairman of the federal open market committee ( fomc ), the federal reserve committee that sets interest rates and makes other decisions about monetary policy. this committee sets policy to advance the mandate given to us by congress : to promote maximum employment and price stability. in the support of these objectives i and my colleagues must also guard as best we can against threats to financial stability, because credit is the lifeblood of the economy. without financial stability we cannot achieve good economic outcomes, as the experience of the past few years so painfully demonstrates. i will talk today about our nation ’ s economy and the challenges that we face. as you know, the state of our economy is important not just for the well - being of our people, but also for the national security of our country. we need a strong economy so that we have the fiscal capacity and technological, industrial and educational dynamism to sustain a military capable of defending america ’ s global interests. today i will focus on why it has proven so difficult to generate a strong economic recovery. i will then lay out some prescriptions as to what we can do to put growth on a firmer footing. this is not just about what the federal reserve can do on the monetary policy front, but also about what other steps can be taken elsewhere – in areas such as financial stability, housing policy, fiscal policy, and structural adjustment to facilitate domestic and global economic rebalancing. before i continue, let me remind you that the views i offer today are my own and do not necessarily represent those

loans were more than offset by repayments and write - offs. only recently has borrowing turned weakly positive. chart 2 illustrates how the stock of net debt in different sectors of the economy evolved throughout this period. it shows that much of the credit boom was concentrated in the household sector. the business sector only experienced a surge from 2006 onward. during the boom, leverage also increased in the financial sector. as the boom proceeded, credit losses were low and earnings strong. but once the bust began, this dynamic reversed. credit losses at financial institutions surged and the sector was forced to deleverage rapidly and raise new capital. this resulted in a significant contraction in the availability of credit and was a major direct shock to the global economy. crucially, this tightening of credit standards exacerbated how much many households and firms had to deleverage. it also crimped demand, inhibiting economic, employment and income growth, which in turn made the deleveraging process more challenging. the nature of this process can be usefully illustrated with a simple, but important accounting identity based on the difference between current income and expenditure in each of the nonfinancial sectors of the economy. for each sector, this difference we call the balance. if the economy were isolated from the rest of the world, then government - sector balance and private - sector balance would add up to zero. in real life, of course, we have a foreign sector, too. if the united states in total spends more than it earns, that must be offset by foreigners spending less than they earn and vice versa. when domestic expenditures exceed income, this produces a deficit in the current account balance. putting these pieces together we have : government - sector balance + private - sector balance = current account balance. as can be seen in chart 3, when the crisis hit, the private - sector balance moved quickly into positive territory as households in general tried to save more, and this was accommodated by a record government deficit and a smaller current account deficit. more recently, the private - sector surplus has declined and the government deficit has decreased, with little change in the external balance. this distribution of surplus and deficit across the economy ’ s different sectors illustrates a substantial challenge for u. s. economy. in the early stages of adjustment, it was quite appropriate for the government to offset part of the sharp increase in private - sector net saving with increased borrowing. if this had not occurred, the recession would have been even deeper. but at