, systemically critical firm. institutions should not be permitted to receive assistance while open, but authorities must be empowered to sell, merge, or break up an institution as necessary to avoid a disorderly unraveling that threatens the financial system as a whole. the resolution agency should not be allowed to protect shareholders and other capital providers and it should have clear authority to impose losses on debt holders, override contracts, and replace managers and directors as appropriate. if, in the end, funds must be injected to resolve a systemically critical institution safely, the ultimate cost must not fall on taxpayers or small financial institutions, but on those institutions that are the source of the too - big - to - fail problem. i don ’ t want to understate the difficulties of creating an effective resolution framework for large, interconnected firms. such firms can be extraordinarily complex, both in terms of their legal structure and in the range and sophistication of their activities. the resolution of large institutions whose operations span many countries poses particular challenges, as legal frameworks vary across countries, and the authorities in each country naturally seek to protect the interests of depositors and creditors in their own jurisdictions. we must also recognize that such resolutions might well take place in the context of a broader crisis, in which the government might be forced to address problems at multiple firms simultaneously. careful planning is therefore essential. an idea worth exploring is to require firms to develop and maintain a so - called living will, which will help firms and regulators identify ways to simplify and untangle the firm before a crisis occurs. 1 see daniel k. tarullo ( 2009 ), “ supervising and resolving large financial institutions, ” speech delivered at the institute of international bankers conference on cross - border insolvency issues, new york, n. y., november 10. the federal reserve and community banks the federal reserve and community banks have much in common beyond our mutual concerns about the too - big - to - fail problem. our interest in community banks has its roots in the founding of the federal reserve in 1913, nearly a century ago. president woodrow wilson and the other founders of the fed, taking note of two previous failed attempts to establish a u. s. central bank, intentionally avoided creating a single, monolithic institution located in washington or new york. instead, they established a system of 12 reserve banks located in major cities around the country. ( it was a federal system – hence the term, “ federal reserve

2000 and beyond, president clinton came up with another way to promote national saving, ironically by reducing the segmentation between social security and the rest of the budget. he proposed making general revenue transfers out of the anticipated general budget surplus and to the social security trust fund. the idea is similar to the special trust fund employed by oil producing countries. while such a move may make for more responsible general budgets, one wonders what happens on the other side of the transfer. since social security ’ s long term budget constraint has been responsible for significant forward benefit cuts, it may not be as feasible, or as easy, to make these cuts in future benefits if there is now the tradition of making general revenue transfers to fill social security ’ s revenue gaps. what may encourage national saving in one budget may discourage it in another. while these budget structures are interesting and potentially worth exploring, my own view is that they are not likely to work in the united states. to me, a capital budget is unlikely to solve any problems and the arrangements involving the social security trust fund are best left alone. in the end, i believe that the way to promote the desirable fiscal goal of raising national saving is simply to argue for it. paying down the national debt reduces interest costs and adds to long term fiscal flexibility. the implicit rise in saving also generates new funds for raising investment, adding skilled jobs and raising living standards in the long run. one would hope that these benefits could be defended in their own right. monetary policy previously we saw that it often makes sense to use monetary policy for stabilization purposes. precisely how is this to be done? the textbook way of thinking about monetary policy still runs in terms of quantities. the central bank operates so that some measure of the money stock or liquidity grows in some relation to the desired growth in real output. but the sharp changes in money velocity in the early 1990s have changed many economists and central bankers from being money quantity watchers to being interest rate watchers. rather than trying to guess the optimal rate of monetary expansion, many analysts now focus directly on interest rates — should they be lower, higher, or the same? john taylor has worked out a simple way of thinking about this question. under what is known as the taylor rule, monetary authorities first determine an equilibrium level of a target interest rate, say the real federal funds rate. the authorities can then adjust the actual funds rate relative to this equilibrium rate depending on inflation relative to its target, and unemployment relative to its target. if