fed two goals : maximum employment and stable prices. we have lots of work to do before we can say we ’ ve met those goals. looking at past deep recessions, you would have expected the economy to be doing much better than it is by now. why has this recovery been so lackluster? the reason has everything to do with what took place beforehand. we ’ ve had a wild ride – first a housing boom of epic proportions, then a housing bust, a near - collapse of the financial system, and a terrible recession. let ’ s go back to 2006, right before the recession hit. that marked the peak of an unprecedented run - up in u. s. home prices. but the bubble burst. home prices plunged by over 30 percent nationwide, and even more in states such as nevada, arizona, and florida. as the housing market went into a tailspin, about a quarter of borrowers found themselves owing more than their homes were worth. delinquencies and foreclosures surged. with millions of mortgages going sour, financial institutions that had placed big bets on home loans posted massive losses. it was like an epidemic. no one knew which financial institutions were infected with toxic assets. everyone was suspect. financial institutions were afraid to lend money to anybody, including each other. that choked off the flow of funds that bis central bankers ’ speeches financial institutions and businesses depend on for their day - to - day operations. the result was a worldwide financial crisis. if left unchecked, this kind of financial panic could have ushered in an economic cataclysm like the great depression, when 25 percent of the workforce was out of work. why didn ’ t we plunge into the abyss? a key reason was that the federal reserve did what it was supposed to do. the fed is the nation ’ s government - chartered central bank. and one of the most important duties of a central bank is to safeguard the financial system. in a crisis, that means acting as lender of last resort, supplying emergency loans to financial institutions when normal funding isn ’ t available. the u. s. treasury department and other federal agencies were also doing all they could to shore up the financial system. now, i know that this financial support to big banks and wall street firms made many people irate, especially when so many americans were losing their jobs or their homes. we should remember, though, that ordinary people suffer terribly when the financial system breaks down. the ultimate

goal of our programs was to avert a major depression and much higher unemployment. because of these programs, we were able to avoid a meltdown of the financial system and head off a depression. but we couldn ’ t prevent a terrible recession. the shock waves from the burst housing bubble and the financial crisis were simply too great. as it happens, it ’ s normal that severe recessions and sluggish recoveries follow financial crises. 1 research at the san francisco fed and other places shows that downturns following financial crises are much more severe when the preceding expansions had unusually rapid growth of credit and leverage. 2 when the credit pendulum swings, it takes many years for household and business spending to return to normal. and, in fact, there was extraordinary credit growth before the recession. between 1999 and 2006, housing debt more than doubled. 3 so it ’ s not so surprising that we got an anemic rebound. the financial crisis unleashed powerful forces that have damped spending and sapped the recovery of its vigor. i ’ ll mention three. first, it destroyed a huge amount of household wealth. second, it flattened the housing market. third, it made it hard for businesses and households to get credit. let ’ s look at each of these. first, when house prices collapsed, the wealth of american households plunged by about six - and - a - half trillion dollars. that equals more than 40 percent of the total size of the u. s. economy. many people went from feeling rich to feeling poor, with neither the means nor the will to spend. instead, they became intent on repairing their finances by increasing their saving and trimming their debt. in other words, they deleveraged. during the recession, the household saving rate climbed to about 6 percent of income from about 1 percent. it ’ s still about 4 - 1 / 2 percent. in the long run, higher saving is healthy. but, in the near term, it puts a brake on spending and slows growth. second, the depressed housing market has been a drag on growth. home construction plays an important role in the economy, of course. when you add in items that often go with a new home – things such as furniture, carpets, and appliances – you ’ re talking about a significant fraction of overall economic activity. 4 today, there are still millions of homes in foreclosure, and millions more on the verge. all those distressed properties are acting like a weight rein