- thirds of economic activity. consumers skilled in managing their finances are better prepared to weather bad times, and stronger household finances overall can help sustain growth, stabilize the economy, and mitigate an economic downturn. stabilizing the economy and mitigating a downturn, of course, also happen to be among the federal reserve ’ s primary responsibilities. when successful, monetary policy can be a powerful and effective tool to these ends, but its capabilities are dwarfed by larger factors such as the productivity of the workforce and the strength of household finances. by educating students and directly supporting their contributions to the economy as producers and consumers, all teachers, especially teachers of economics, are effectively furthering our mission at the fed, so let me offer my thanks for making that job a little easier. to help support your important work as teachers, the federal reserve board and the 12 reserve banks conduct programs, organize events, and publish books and other materials to spread knowledge of the role of the fed — and economics in general — and to promote financial literacy. before i get to those events and programs, let me say a word about what is probably the most important pedagogical aid that the fed produces — the 182 - page book called the federal reserve system : purposes and functions. the 10th edition of purposes and functions, published in october of last year, offers a detailed and comprehensive account of 1 / 2 bis central bankers'speeches what, why, and how the fed carries out its different responsibilities. i think it is a wonderful resource for teaching about the fed, and copies are available via the board ’ s website. 1 each of the fed ’ s reserve banks has community outreach and educational initiatives in the areas of the country they serve, and the outreach to economics teachers is coordinated by the group chaired by amy hennessy, the federal reserve system economic education group. at the board, we have for some years operated a program called feded, which sends fed employees into schools throughout the washington, d. c., metropolitan area and sponsors events for students here at the eccles building. 2 feded ’ s outreach to schools depends on the time and sacrifice of several dozen research assistants, who are typically recent college graduates who work for two or three years at the board. research assistants who volunteer for feded visit schools ; help teach about the fed, economics, and finance ; and answer questions about work opportunities at the board. the federal reserve is committed to promoting diversity in our ranks and in the economics

driving investors to reach for higher returns, thereby lowering the compensation for bearing credit risk and many other financial risks over recent years. the search for yield is particularly manifest in the massive inflows of funds to private equity firms and hedge funds. these entities have been able to raise significant resources from investors who are apparently seeking above - average risk - adjusted rates of return, which, of course, can be achieved by only a minority of investors. to meet this demand, hedge fund managers are devising increasingly more complex trading strategies to exploit perceived arbitrage opportunities, which are judged - in many cases erroneously - to offer excess rates of return. this effort is particularly evident in the pronounced growth and increasing complexity of collateralized debt obligations. although collateralized debt obligations are a powerful tool for enhancing risk management by separating idiosyncratic risks from systematic risks, the models used to price and hedge these instruments are just beginning to be tested. i have no doubt that many of the new hedge fund entrepreneurs are embracing a strategy of pinpointing temporary market inefficiencies, the exploitation of which is expected to yield aboveaverage rates of return. for the time being, most of the low - hanging fruit of readily available profits has already been picked by the managers of the massive influx of hedge fund capital, leaving as a byproduct much - more - efficient markets and normal returns. but continuing efforts to seek above - average returns could create risks for which compensation is inadequate. significant numbers of trading strategies are already destined to prove disappointing, a point that recent data on the distribution of hedge fund returns seem to be confirming. consequently, after its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy. but so long as banks and other lenders to these ventures are managing their credit risks effectively, this necessary adjustment should not pose a threat to financial stability. i trust such an episode would not induce us to lose sight of the very important contributions hedge funds and new financial products have made to financial stability by increasing market liquidity and spreading financial risk, and thereby enhancing economic flexibility and resilience. * * * the economic and financial world is changing in ways that we still do not fully comprehend. policymakers accordingly cannot always count on an ability to anticipate potentially adverse developments sufficiently in advance to effectively address them. thus our economies require, in my judgment, as high a degree of flexibility and resilience to unantici