whose persistent weakness has had a major impact on economic and financial conditions more broadly, and will improve the financial condition of some households by facilitating refinancing. in addition, open - market purchases should benefit credit markets by adding liquidity and balance sheet capacity to the system. support for specific institutions in addition to those programs i have just discussed, the federal reserve has provided financing directly to specific systemically important institutions. with the full support of the treasury, we used emergency lending powers to facilitate the acquisition of bear stearns by jpmorgan chase & co. and also to prevent default by aig. these extensions of credit are very different than the other liquidity programs discussed previously and were put in place to avoid major disruptions in financial markets. from a credit perspective, these support facilities carry more risk than traditional central bank liquidity support, but we nevertheless expect to be fully repaid. credit extended under these programs has varied but recently has accounted for only about 5 percent of our balance sheet. that said, these operations have been extremely uncomfortable for the federal reserve to undertake and were carried out only because no reasonable alternative was available. as noted in the joint federal reservetreasury statement i mentioned earlier, we are working with the administration and the congress to develop a formal resolution regime for systemically critical nonbank financial institutions, analogous to one already in place for banks. such a regime should spell out as precisely as possible the role that the congress expects the federal reserve to play in such resolutions. liabilities having reviewed the federal reserve's main asset accounts, let me now touch briefly on the liability side of the balance sheet. historically, the largest component of the federal reserve's liabilities has historically been federal reserve notes – that is, u. s. paper currency. currency has expanded over time in line with nominal spending in the united states and demands for u. s. currency abroad. by some estimates, a bit over one - half of u. s. currency is held outside the country. other key liabilities of the federal reserve include the deposit accounts of the u. s. government and depository institutions. the u. s. government maintains a " checking account " with the federal reserve – the so - called treasury general account – from which most federal payments are made. more recently, the treasury has established a special account at the federal reserve as part of its supplementary financing program ( sfp ). under this program, the treasury issues special treasury bills and places the proceeds

has widened significantly, in part reflecting the strength of domestic demand that has accompanied the further accumulation of capital gains. the continued increase in our net external debt and its growing servicing costs clearly are not sustainable indefinitely. – 4 – in light of the importance of financial markets in the economy, and of the volatility and vulnerability in financial asset prices more generally, policymakers must continue to pay particular attention to these markets. the federal reserve ’ s easing last fall responded to an abrupt stringency in financial markets and the effects that the consequent increased risk aversion was likely to have on economic activity going forward. we were particularly concerned about higher costs and disrupted financing in debt markets, where much of consumption and investment is funded. we were not attempting to prop up equity prices, nor did we plan to continue to ease rates until equity prices recovered, as some have erroneously inferred. this has not been, and is not now, our policy or intent. as i have discussed earlier, movements in equity prices can play an important role in the economy, which the central bank must take into account. and we may question from time to time whether asset prices may not embody a more optimistic outlook than seems reasonable, or what the consequences might be of a further rise in those prices followed by a steep decline. but many other forces also drive our economy, and it is the performance of the entire economy that forms our objectives and shapes our actions. nonetheless, in the current state of financial markets, policymakers are going to have to be particularly wary of actions that unnecessarily sow uncertainties, undermine confidence, and interfere with the efficient allocation of capital on which our economic prosperity and asset values rest. it is important not to undermine the highly sensitive ongoing process of reallocation of capital from less to more productive uses. for productivity and standards of living to grow, not only must capital raised in markets be allocated efficiently, but internal cash flow, including the depreciation charges from the existing capital stock, must be continuously directed to their most profitable uses. it is this continuous churning, this so - called creative destruction, that has become so essential to the effective deployment of advanced technologies by this country over recent decades. in this regard, drift toward protectionist trade policies, which are always so difficult to reverse, is a much greater threat than is generally understood. it is well known that erecting barriers to the free flow of goods and services across national borders undermines the division of