of this complexity intact, it would produce a slightly simpler allocation of supervisory responsibilities. we can thus narrow the question i posed at the beginning, of whether the fed should supervise banks, to the question of whether the fed ’ s supervisory role generates economies of scope of sufficient social benefit to outweigh any associated costs. in the remainder of my remarks, i will discuss some economies of scope arising from the combination of bank supervision and other central bank responsibilities. although i will touch on a number of complementarities between these activities, my focus will be the benefits of the fed ’ s supervisory authority for the execution of one of its core functions : the prevention and management of financial crises. in particular, i will argue that the fed ’ s ability to deal with diverse and hard - to - predict threats to financial stability depends critically on the information, expertise, and powers that it holds by virtue of being both a bank supervisor and a central bank. the federal reserve ’ s supervisory authority as a starting point, some background on the federal reserve ’ s supervisory authority may be helpful. the federal reserve shares the responsibility for regulating and supervising the u. s. financial system with a number of federal and state government agencies, including the other banking agencies, the securities and exchange commission ( sec ), and the commodity futures trading commission. the fed, along with state authorities, supervises state member banks ( that is, state - chartered banks that are members of the federal reserve system ). in addition, it supervises the u. s. operations of foreign banks and, in some cases, the foreign operations of u. s. banks. the federal reserve also serves as the umbrella supervisor of all bank holding companies and financial holding companies, which gives the u. s. central bank broad oversight responsibilities for these banking organizations. however, the bank and nonbank subsidiaries of such holding companies are often supervised by agencies other than the fed. supervisory responsibility is determined by the type of charter held by the supervised company and by the principle of functional regulation, under which the identity of the primary supervisor depends on the nature of the financial activity being carried out. for example, the commercial banking activities of holding - company subsidiaries with national bank charters are supervised by the office of the comptroller of the currency ( occ ), whereas securities activities in nonbank subsidiaries are under the jurisdiction of the sec. the fed cooperates with the occ, the sec, and other supervisors in determining the financial condition of the consolidated organization. the

of the total budget for the u. s. federal government. state and local governments more or less finance their current spending and do not have much outstanding debt apart from that backed by capital formation ; and federal capital investment is very small. these statements are based on estimates of the congressional budget office, the budget and economic outlook, fiscal years 2005 to 2014 ( january 2004 ). a further discussion of the long - run budget outlook can be found in alan j. auerbach, william g. gale, peter r. orszag, and samara r. potter, “ budget blues : the fiscal outlook and options for reform, ” in henry j. aaron, james lindsay, and pietro nivola ( eds. ), agenda for the nation ( the brookings institution, 2003 ). see also the general accounting office, truth and transparency : the federal government ’ s financial condition and fiscal outlook on the trade side, figure 2 shows that the trend is definitely more worrisome. while the budget debt has fluctuated between 25 percent and 50 percent of gdp over the past several decades, the net external debt has grown steadily. until 1985, this external debt was not even positive ; that is, until that time the united states had net claims on foreigners. but because the united states has run persistent and sizable primary trade deficits since 1990, the net external debt is now 25 percent of gdp and rising sharply. the primary trade deficit is now 5 percent of gdp, violating the stability condition by nearly this same amount. at this rate, the external debt ratio will climb very quickly. while the trade deficit does have equilibrating tendencies, as will be discussed later, there are also forces that tend to increase it. econometric studies of the basic demand for imports and exports find that the u. s. income elasticity of demand for imports is higher than the foreign income elasticity of demand for u. s. exports. this means that even if the world economy grows at the same rate as the u. s. economy, our trade deficit is likely to widen, ( apart from any changes in relative prices ). 8 indeed, the u. s. primary trade deficit has widened steadily since 1990. adjustments i have just argued that the u. s. is now in violation of the stability condition for both budget and trade deficits - recently and moderately on the budget side, persistently and significantly on the trade side. what are the implications? with each deficit there is