system. stephanie chaly, james hennessy, thomas noone and joseph tracy assisted in preparing these remarks. see malcolm gladwell, the tipping point ( 2002 ), 133 – 168 ( collecting sources ). for additional information on the famous stanford prison experiment, see www. prisonexp. org. adam smith, the theory of moral sentiments ( 11th ed. 1812 ), 276. e. gerald corrigan, are banks special?, federal reserve bank of minneapolis annual report, january 1983. cf. joseph story, commentaries on the law of bailments § 464 ( 1832 ). ( “ the soundness of the public policy of subjecting particular classes of persons to extraordinary responsibility, in cases where an extraordinary confidence is necessarily reposed in them, and there is an extraordinary temptation to fraud, or danger of plunder, can hardly admit of question ; and has been recognized in the jurisprudence of many countries. ” ). bis central bankers ’ speeches industry responsibility two years ago, i noted that recent scandals in banking evidenced “ deep - seated cultural and ethical failures. ” 5 many of the industry ’ s leaders now agree. according to the federal advisory council of the federal reserve system, a group composed of senior representatives from the industry, “ as often as not [... ] the challenges faced in recent years have been behavioral and cultural ; post - crisis episodes such as libor and foreign exchange manipulation provide hard evidence that there remains work to be done. ” 6 last year i argued that “ the solution [ to cultural problems ] needs to originate from within the firms, from their leaders. ” 7 i view today ’ s workshop as a progress report on the industry ’ s efforts. this is an opportunity for us to discuss collectively what is working, what is not, and the next steps that are needed. we should take care, though, not to confuse cause and effect. the banking scandals that followed the financial crisis are evidence that something fundamental is wrong. i would encourage each of you to consider not just specific examples of misconduct, but the patterns within them that point to underlying causes. i suspect we will see a strong overlap with those factors that contributed to the financial crisis. i think your focus should be less on the search for bad apples and more on how to improve the apple barrels. role of the official sector dodd - frank strengthened bank balance sheets, and banks have become more resilient to systemic shocks. this is a positive development. at the same time, it is

shortcomings in those institutional structures available to support the workout of the overhang of mortgage debt in an efficient and timely manner. a second reason may be the series of additional negative shocks experienced since the initial phase of the financial crisis. the largest of these relate to the crisis in the eurozone. but one could also add the periodic commodity price shocks, the disruptive impact of the tragic japanese earthquake and tsunami on global trade and production, and the effect of the uncertainties around the impending fiscal cliff on hiring and investing. that said, the shocks since the acute phase of the crisis in the united states were not uniformly negative. take, for example, the sharp increase in u. s. oil and natural gas production stemming, in part, from the innovations in drilling and extraction technologies. not only does this rising production directly boost real gdp, but also the large drop in natural gas prices has significantly improved the industrial competitiveness of u. s. - based businesses. a third reason for the weaker than expected recovery likely lies in the interplay between secular and cyclical factors. in particular, i believe that demographic factors have played a role in restraining the recovery. the developed world ’ s populations are aging rapidly. in the united states, for example, the baby boom generation, which is a particularly large cohort, is now beginning to retire. as the population ages, this has two consequences. first, the spending decisions of the older age cohorts are less likely to be easily stimulated by monetary policy. that is because such age groups tend to spend less of their incomes on consumer durables and housing. second, as the population ages and the number of retirees climbs, the costs associated with social security, government pensions, and healthcare retirement benefits increase. this creates budgetary pressure and leads to a choice of raising revenue to fund these costs, cutting other government programs, or cutting benefits. now if this all had been fully anticipated by retirees and near - retirees, then this would already be factored into their spending and saving decisions. but, i doubt that this has been the case. i suspect that many have been surprised by the swift change in economic circumstances as the housing boom went bust. i doubt that many fully anticipated the budget crunch and the prospect that their future retiree and healthcare benefits would likely be curbed or their taxes would have to rise in the future. when households begin to anticipate this, they reduce their assessment of their sustainable living standards. this downward