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  • Banks Increasing Lending, But Not Necessarily Risk

    It has taken some time to restart borrowing, and lending, after the Great Recession, but consumers are taking on more debt. For three straight quarters, total consumer debt has risen, note at Liberty Street Economics. But is this the result of banks now being less risk averse? According to some recent work by the New York Fed 's Basit Zafar , Max Livingston , and Wilbert van der Klaaw , that does not seem to be the case. From Liberty Street Economics : To assess the demand for credit and measure how much of that demand was met, we classify our respondents into four groups. In February 2014, 40 percent of respondents reported not applying for any type of credit over the past twelve months because they didn’t need it (satisfied consumers); 40 percent of respondents reported applying for some type of credit and being approved (accepted applicants); 13 percent reported applying for some type of credit and being rejected (rejected applicants); and 8 percent reported not applying for credit despite needing it because they believed they would not be approved. This last group represents latent demand for credit; we refer to them as discouraged consumers. The leftmost two bars in the chart below show that the distribution of respondents in February 2014 looked quite similar to that in May 2013 (the results of which we discussed in a previous post ): we see a slight increase in satisfied consumers from May to February and a slight decrease in accepted applicants. Note that the SCE is a rotating panel, so the respondents in the two surveys will be different; however, we use weights to ensure that the statistics reported in this post remain representative of the population of U.S. household heads. The picture, however, varies radically when split by credit score. The chart above shows that individuals with lower credit scores (those with credit scores below 680) were more likely to report that they were rejected, and much more likely to report that they were discouraged, than their more creditworthy counterparts. In February, 22 percent of respondents in the low-credit-score group were discouraged, versus 3 percent in the middle-credit-score group, and zero percent in the high-credit-score group (those with scores of above 760). Furthermore, the chart shows that credit experiences got markedly worse for the low-credit-score group in February 2014 compared with May 2013: 57 percent of this group reported either being denied credit or being too discouraged to apply in February this year, versus 47 percent in May of last year. This result contrasts with the experiences of their more creditworthy counterparts, which were largely unchanged since May 2013. These patterns suggest that although banks may be increasing their lending activity, they are not necessarily taking on more risk, as the risky population has not seen an improvement in its ability to obtain credit. Read Rising Household Debt: Increasing Demand or Increasing Supply? here .
  • A New Primer on China From McKinsey

    Do you have an hour for China? That is, do you have an hour you can spare to understand the leading economic story of the century? McKinsey's Jeffrey Towson and Jonathan Woetzel have written The One Hour China Book in an effort to bring us all up to speed on the key pieces to understanding what is happening in the world's most populous country and the impact of activity there on life everywhere. If you can't spare an hour just yet, here are the "six big trends" from the book, as shared at McKinsey Insights : Here's a little more on trend number 3: The American middle class was the world economy’s growth engine throughout the 20th century. Now, the engine is the Asia–Pacific region, which will account for two-thirds of the world’s middle class by 2030. While Chinese consumers’ focus on “value for money” has driven the rise of companies such as apartment builder China Vanke and Tingyi Holding Company—the business behind China’s dominant instant-noodle brand—buying habits are changing. As urbanization accelerates, consumer spending is becoming more like that of the West’s middle class. Urban Chinese are shopping to meet emotional needs, driving a skyrocketing demand for middle-class goods, food, and entertainment. As an example, China consumed more than 13 million tons of chicken in 2012—more than the United States. Tyson Foods’s China operations has facilities able to process more than three million chickens per week, and Chinese chicken consumption, which grew by 54 percent from 2005 to 2010, is expected to grow an additional 18 percent annually during the next five years. For additional evidence, look no further than the fact that the largest Chinese acquisition of a US company had nothing to do with technology, cars, or energy. In 2013, Chinese Shuanghui International spent $7.1 billion to buy American Smithfield, the world’s largest pork producer and processor. It’s not surprising, then, that agribusiness is one of China’s hottest new industries. Almost every aspect needs to be improved, from land and water use to logistics and retail. Legend Holdings, the parent company of Lenovo, now lists modern agriculture as one of its five core areas, with a portfolio that includes kiwi and blueberry farming. Read All you need to know about business in China here .
  • A 'Bullish' Take on Potentially 'Hawkish' New Fed Chair

    We tend to avoid discussing the economy (or politics) at the family holiday gatherings. Paul Kasriel does not. This Thanksgiving Janet Yellen and how she might lead the Federal Reserve over the next year was the central topic of discussion. He expects to come back to the topic next year. In fact, he's already written his keynote. Here's an excerpt (from The Encontrarian ,h/t The Big Picture ): Monetary policy is all about modulating nominal aggregate transactions. Monetary policy affects the amount of a certain kind of credit created in the economy — credit that is created, figuratively, out of thin air. An increase in this thin-air credit enables the recipients of it to increase their purchases of goods, services and/or assets – physical and financial – without necessitating anyone else to correspondingly reduce his current spending/transactions. Regrettably, there do not exist data of total transactions in the U.S. economy. But there is a measure calculated by the Bureau of Economic Analysis that is an estimate of the nominal dollar amount of expenditures by U.S. residents on currently-produced goods and services, some of which are produced domestically, some of which are produced abroad. This measure is called nominal Gross Domestic Purchases. Plotted in Chart 1 are year-over-year percent changes in quarterly observations of nominal Gross Domestic Purchases and the sum of Federal Reserve credit and depository institution credit from 1953:Q1 through 2013:Q2. As I have discussed ad nauseam in previous commentaries, both Fed credit and depository institution credit are created, figuratively, out of thin air. The measure of Fed credit included in the credit sum is another sum – the sum of Fed outright holdings of securities and Fed holdings of securities via repurchase agreements. The Fed’s current Quantitative Easing (QE) policy involves increased outright acquisitions of securities. Depository institution credit consists of the loans and securities on the books of institutions that issue deposits redeemable at par – commercial banks, saving institutions and credit unions. Since the S&L crisis of the early 1990s and the financial crisis of 2008, commercial banks account for the overwhelming largest component of depository institution credit. Notice in Chart 1 that changes in the sum of Fed and depository institution credit, advanced by one quarter, has a correlation coefficient of 0.65 (out of a possible maximum of 1.00) with changes in the sum of nominal Gross Domestic Purchases. This correlation of 0.65 is higher than that obtained when the two series are compared on a coincident basis. This correlation is higher than that obtained when changes in nominal Gross Domestic Purchases is advanced one quarter relative to changes in the sum of Fed and depository institution credit. Thus, the evidence in Chart 1 suggests that not only do changes in nominal Gross Domestic Purchases and changes in the sum of Fed credit and depository institution credit move in close tandem, but also that changes in the sum of Fed and depository institution credit “cause” (in a statistical sense) changes in nominal Gross Domestic Purchases. Read Unless the Fed Goes Cold Turkey on Us, Expect a Bountiful Economic Harvest for Thanksgiving 2014 here .
  • The Relationship Between Finance and Growth In Highly Advanced Economies

    We have come to accept that there is a direct relationship between the strength of a financial system and economic growth. The "literature" mostly supports that thinking, according to Thorsten Beck . But, Beck notes, recent studies point to a curious deviation: there may be diminishing returns, or worse. The relationship between financial system and growth may even "[turn] negative at very high levels of financial development." From Vox : What are the reasons for this insignificant or even negative relationship between finance and growth across high-income countries? Recent papers have put forward several explanations. While these are not necessarily incompatible with each other, they have different policy implications. •First, the measures of financial depth and intermediation the literature has been using might be simply too crude to capture quality improvements at high levels of financial development. Some authors have argued that it is not so much the quantity of financial intermediation, but the quality that matters (Hasan, Koetter and Wedow 2009). The question is, however, whether there are limits to these efficiency gains, as there are to the volume of intermediation. In addition, the financial sector has gradually extended its scope beyond the traditional activity of intermediation towards so-called 'non-intermediation' financial activities (Demirgüc-Kunt and Huizinga 2010). As a result, the usual measures of intermediation services have become less and less congruent with the reality of modern financial systems. The literature has not developed yet good gauges of these non-intermediation services to properly assess their relationship with economic growth. •A second explanation focuses on the beneficiaries of the credit. While the theoretical and most of the empirical finance and growth literature has focused on enterprise credit, financial systems in high-income countries provide a large share of their services, including credit, to households rather than enterprises. In several countries, including Canada, Denmark, and the Netherlands, household credit constitutes more than 80% of overall bank credit – mostly mortgage credit. Theory makes ambiguous predictions about the effects on the relationship between household credit and growth, and initial empirical evidence shows an insignificant relationship between the two (Beck et al. 2012). The relationship between financial deepening and economic growth goes through enterprise credit, and the fact that much of the financial deepening in high-income countries over the past 20 years has been in household credit can partly explain the insignificant relationship between finance and growth in these countries. •A third explanation posits the financial system might actually grow too large relative to the real economy if it extracts excessively high informational rents, and in this way attracts too much young talent towards the financial industry (Bolton et al. 2011, Philippon 2010). Kneer (2013a,b) provides empirical evidence for this hypothesis, showing that industries relying more on human capital suffer more in their productivity as the financial system expands. This hypothesis thus clearly points to a trade-off between the intermediation function a financial sector provides to the real economy and a drain on talent needed by the same real economy. Read Finance and growth: Too much of a good thing? here .
  • 'Africa is Booming'

    "Africa is booming," says Charles Robertson at the start of his TedTalk . Rapid economic growth, and the quality-of-life improvements that come with it, has begun across the continent, according to Robertson. In this talk, Robertson, chief economist at Renaissance Capital, shares the data he collected as lead author of The Fastest Billion . And one would be hard pressed to find a more optimistic take on how quickly Africa's emerging economies will become strong players in the global economy:
  • Third Quarter Growth in China Exceeds Expectations

    China's economy grew at a rate of 7.8% in the third quarter, according to the National Bureau of Statistics . As Quartz 's Gwynn Guilford points out, this is above the 7.5% target growth rate that China's government has set. And yet, Guilford notes, we are right to wonder whether China's economy is on a path to reliable growth. Guilford asks, "is it safe to call this a return to form?" It depends on meaning of “form.” If you mean unstoppable economic engine that leaves all other emerging markets in the dust, then maybe. If you’re talking about growth dependent on government support and cheap bank loans, then definitely. From January to June, investment in transportation—things like overpasses and railway tracks—grew 21.5% on the previous year. Something goosed that a lot in the third quarter: in the nine months ended in September, transportation investment leapt 40.6% on the same period the previous year. Other things soared even more, such as water conservancy (up 52.2%), which includes investments in sewer systems and the lik(sic). This investment obviously had a lot to do with the stimulus-in-all-but-name that the government set into motion early in the quarter. That was around the time it became clear that there wasn’t much in the way of organic growth to prevent the economy from sputtering. The headline 7.8% growth figure, therefore, owes more to the government’s fiscal pump-priming than to genuine growth driven by genuine demand. Read China’s GDP bounced back thanks to a major injection of government spending here. Read the full post here .
  • Kenya's Recent Economic Recovery

    The IMF is hosting a conference on emerging economies next week. And IMF leaders have chosen Kenya as the host country because they see the African nation as a model for other emerging economies. The IMF will be highlighting recent policy reforms by Kenya's government, including a $700 million program designed to extend access to credit. In the following interview, Antoinette Sayeh , Director of the IMF's African Department, discusses Kenya's recent successes:
  • The Economist: 'No Hard Landing' for China's Economy

    What if we were to tell you we are predicting 7.5% growth for your economy? You'd be pretty happy, right? Unless maybe you were in China. There has been a fair bit of hand-wringing this summer over the relative leveling off of economic indicators out of the world's second largest economy. Economist correspondents Ryan Avent and Simon Cox recently discussed the state of China's economy. At present, Cox says, the traditional indicators are quite strong. But there are some troubling signs when it comes to credit levels.
  • The Threat of Bad Loans and China's Growth

    It is hard to think of an A+ grade as a bad thing, but Fitch 's downgrading of the China's debt rating, and the local currency rating, to an A+ (from AA-) is not exactly welcome news. It points to one factor that could slow growth in China's economy: debt concerns. It appears that the global economy's next superpower is not immune from some of the finance issues that have hit in the West--namely credit buildup and shadow banking . Fitch Ratings ' Andrew Colquhoun spoke with the Wall Street Journal 's Deborah Kan about the downgrade, and his firm's concerns over bad loans in China:
  • The Use of Credit in Roman Times

    When most of us read about the Roman Empire at its height, we imagine coins, and maybe barter items, as essential to every transaction. But just because there isn't an historical record of banks--at least as far as we think of them--doesn't mean there wasn't a somewhat sophisticated finance system. At The Big Picture , Marco Del Negro and Mary Tao take us back to the time of Cicero: Large sums of money changed hands in Roman times. People bought real estate, financed trade, and invested in the provinces occupied by the Roman legions. How did that happen? Cicero writes, in Epistulae ad Familiares 5.6 and Epistulae ad Atticum 13.31, respectively: “I have bought that very house for 3.5 million sesterces” and “Gaius Albanius is the nearest neighbor: he bought 1,000 iugera [625 acres] of M. Pilius, as far as I can remember, for 11.5 million sesterces.” How? asks historian H. W. Harris (in “The Nature of Roman Money”)–“mechanically speaking, did Cicero pay three and half million sesterces he laid out for his famous house in the Palatine . . . . That would have meant packing and carrying some three and half tons of coins through the streets of Rome. When C. Albanius bought an estate from C. Pilius for eleven and half million sesterces, did he physically send the sum in silver coins?” Harris’ answer is: “Without much doubt, these were at least for the most part documentary [i.e., paper] transactions. The commonest procedure for large property purchases in this period was the one casually alluded to by Cicero [De Officiis 3.59] . . . ‘nomina facit, negotium conficit’ . . . provides the credit [or ‘bonds’–nomina], completes the purchase.” What exactly are these nomina?–from which, by the way, comes the term “nominal,” so commonly used in economics. In his Ph.D. dissertation “Bankers, Moneylenders, and Interest Rates in the Roman Republic,” C. T. Barlow writes (pp. 156-7): “An entry in an account book was called a nomen. Originally the word meant just that–a name with some numbers attached. By Cicero’s day . . . [n]omen could also mean “debt,” referring to the entries in the creditor’s and the debtor’s account books.” And this “debt was in fact the lifeblood of the Roman economy, at all levels . . . nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for a great number of others” (Harris, p. 184). Pliny the Younger writes, for example, (in Epistulae 3.19): “Perhaps you will ask whether I can raise these three millions without difficulty. Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble.” For concreteness, say that some fellow, Sempronius, owes you one million sesterces. You–or in case you’re a wealthy senator, or eques, your financial advisor (procurator–Titus Pomponius Atticus was Cicero’s)–would record the debt in the ledger. What if you suddenly needed the money to buy some property? Do you have to wait for Sempronius to bring you a bag with 1 million sesterces? No! As long as Sempronius is a worthy creditor (a bonum nomen [see Barlow, p. 156]; in the modern parlance of credit rating agencies, a triple-A creditor), you’d do what Cicero says: transfer the nomina, strike the deal. For example, Cicero writes to his financial advisor Atticus (Ad Atticum 12.31): “If I were to sell my claim on Faberius, I don’t doubt my being able to settle for the grounds of Silius even by a ready money payment.” As Harris (p. 192) observes: “Nomina were transferable, and by the second century B.C., if not earlier, were routinely used as a means of payment for other assets . . . . The Latin term for the procedure by which the payer transferred a nomen that was owed to him to the seller was delegatio.” Read Historical Echoes: Cash or Credit? Payments and Finance in Ancient Rome here .
  • James Hamilton's Monetary Policy Review

    At Econbrowser , James Hamilton reviews U.S. monetary policy over the last four years. Or, to be exact, over the last 4 years and 4 months, since we have to start at September 2008. The fireworks began when the collapse of Lehman Brothers in September 2008 led to a freezing of credit for all kinds of essential economic activities. The Fed stepped in with a number of emergency lending programs such as the Commercial Paper Lending Facility to help the commercial paper market continue to function, currency swaps to assist foreign central banks cope with emergency dollar needs, and the Term Auction Facility to provide direct liquidity to U.S. banks. These programs totaled over $1.7 trillion at the end of 2008, but have since all been wound down. The Fed came out of it all making a profit that was returned to the U.S. Treasury. The need for these facilities began to ease in 2009, but the economy was far from healthy, with unemployment continuing to shoot up. This led to the Fed's decision in March 2009 to replace the emergency lending with large-scale purchases of mortgage-backed securities guaranteed by Government Sponsored Enterprises and to a lesser extent long-term U.S. Treasury securities. These purchases were popularly described in the financial press as the first round of quantitative easing, or QE1. Their effect was to keep the total value of assets held by the Federal Reserve from falling as the emergency lending programs declined. You may know the rest of the story. But probably not as well as Hamilton. In any case, his summary is quite handy. Read it here .
  • Bernanke: U.S. Economy in Line for a Happy New Year, If...

    Speaking at the Economic Club of New York yesterday, Federal Reserve Chair Ben Bernanke said the U.S. economy is on track for a "very good year." But there are some significant ifs attached. Primary among them are continuing the housing recovery, improved conditions in Europe, further thawing of the credit markets, and the big if, avoiding the so called fiscal cliff: First, the Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law--the so-called fiscal cliff. The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery--indeed, by the reckoning of the Congressional Budget Office (CBO) and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession. Second, early in the new year it will be necessary to approve an increase in the federal debt limit to avoid any possibility of a catastrophic default on the nation's Treasury securities and other obligations. As you will recall, the threat of default in the summer of 2011 fueled economic uncertainty and badly damaged confidence, even though an agreement ultimately was reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs. As fiscal policymakers face these critical decisions, they should keep two objectives in mind. First, as I think is widely appreciated by now, the federal budget is on an unsustainable path. The budget deficit, which peaked at about 10 percent of GDP in 2009 and now stands at about 7 percent of GDP, is expected to narrow further in the coming years as the economy continues to recover. However, the CBO projects that, under a plausible set of policy assumptions, the budget deficit would still be greater than 4 percent of GDP in 2018, assuming the economy has returned to its potential by then. Moreover, under the CBO projection, the deficit and the ratio of federal debt to GDP would subsequently return to an upward trend.9 Of course, we should all understand that long-term projections of ever-increasing deficits will never actually come to pass, because the willingness of lenders to continue to fund the government can only be sustained by responsible fiscal plans and actions. A credible framework to set federal fiscal policy on a stable path--for example, one on which the ratio of federal debt to GDP eventually stabilizes or declines--is thus urgently needed to ensure longer-term economic growth and stability. Even as fiscal policymakers address the urgent issue of longer-run fiscal sustainability, they should not ignore a second key objective: to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery. Fortunately, the two objectives are fully compatible and mutually reinforcing. Preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability. At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today. Coming together to find fiscal solutions will not be easy, but the stakes are high. Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears already to be affecting private spending and investment decisions and may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy. Continuing to push off difficult policy choices will only prolong and intensify these uncertainties. Moreover, while the details of whatever agreement is reached to resolve the fiscal cliff are important, the economic confidence of both market participants and the general public likely will also be influenced by the extent to which our political system proves able to deliver a reasonable solution with a minimum of uncertainty and delay. Finding long-term solutions that can win sufficient political support to be enacted may take some time, but meaningful progress toward this end can be achieved now if policymakers are willing to think creatively and work together constructively. Read the full speech here .
  • SF Fed: 'Credit Access Following a Mortgage Default'

    In a new Economic Letter for the San Francisco Fed , William Hedberg and John Krainer take a look at the impact defaulting on a mortgage has on borrowers returning to the mortgage market. Not surprisingly, it takes defaulters a long time to get back into the home-owning game. For the vast majority (90%), that means not getting another mortgage for at least a decade. So the idea that defaulting represents an easy way out of a bad investment, and therefore something of a clean slate, does not seem to hold up. From the article: We treat access to credit as a decision more or less made by lenders. In other words, at what point are they willing to lend again to a borrower with a tarnished history? In reality, borrowers may not want credit. The data only show the quantity of credit outstanding. They do not directly indicate credit demand or supply, although some inferences regarding credit supply can be made. In addition, important institutional restrictions affect credit following mortgage default or foreclosure, especially mortgage borrowing. People with a major derogatory event on their credit history, such as foreclosure or bankruptcy, typically can’t qualify for a conventional loan securitized through government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac until four to seven years have elapsed, depending on circumstances surrounding the event. This restriction does not completely preclude lending to borrowers who have recently defaulted. A lender has the option of making the loan and keeping it on its own balance sheet instead of selling it to one of the GSEs. However, the GSEs own or guarantee the vast majority of new mortgages, which makes the restriction a powerful barrier keeping defaulters from returning to the market. The Equifax data confirm that a prior mortgage default has a large effect on future access to mortgage credit. Figure 1 shows the rate at which borrowers with different credit histories return to the mortgage market following a termination or exit. Termination is defined as having a zero mortgage balance after having a positive mortgage balance. The blue line in Figure 1 plots the rate for returning to the mortgage market for borrowers with no prior defaults or foreclosures. We do not know why these borrowers terminated their mortgages. They could have moved, or adjusted their housing expenditures by trading up or downsizing. Or they could have paid down their mortgages and now own their houses outright. We might expect that most borrowers who have paid off their mortgages will never return to the market. Indeed, 12 years after a termination, just above 35% of borrowers with no prior defaults have taken out new mortgages. This number may seem low. But, as the red line in Figure 1 shows, it is much higher than the average rate at which borrowers with prior defaults return to the mortgage market over the same time horizon. Read Credit Access Following a Mortgage Default here .
  • Andy Xie: 'Australian economy is probably a bubble on top of China's overinvestment bubble'

    Australia sat out the global economic crisis as much as any major economy could. Thanks to mining wealth and ripple effects from China, Australia has seen strong growth while trading partners in the West have struggled. But Chinese economist Andy Xie , Director at Rosetta Stone Advisors , warns that Australia may be due for a financial crisis of its own in the coming year. Writing at The Big Picture , Xie outlines the threat to an economy that may have become too closely tied to China's fortunes and easy credit: The Australian economy has boomed more than any other developed economy over the past decade. Its nominal GDP has doubled in a decade, and its currency value against the U.S. dollar has doubled too. As a result, its per capita income is much higher than in the United States or Europe. Its property is the most expensive among developed economies. The price of its main export, iron ore, appreciated ten times at its peak, which justified some of its prosperity. Foreign investment in its mining sector has played a more important role. It has caused the Australian dollar to appreciate strongly despite its current account deficit and higher inflation than elsewhere. The strong currency has attracted financial capital from retail investors in China and Japan. The snowball effect on the financial side has made the Australian economy strong despite the recent tumbling of the price of iron ore. As mentioned, the investment flow is sticky due to the long cycle of mining asset development. So much capital inflow has pumped up Australia’s monetary system, creating an environment of easy credit. This is the factor behind the real estate and consumption booms. If capital inflow is a bubble, Australia’s property market must be a bubble, too. When the capital inflow reverses, the bubble will pop. The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too. Among the mining investors I have met there is strong hope that China would soon introduce a stimulus like in 2008. This is why the price of iron ore has rebounded by 40 percent recently. Bottom fishers came in to speculate on China’s possible stimulus before or soon after the 18th Party Congress. They are likely to be disappointed. The last stimulus has made the overinvestment situation so severe that another round is just plain wrong. Also, it would trigger severe inflation and currency devaluation. I just don’t see it happening. Read A Hard Landing Down Under here .
  • Bernanke: 'Five Questions about the Federal Reserve and Monetary Policy'

    Ben Bernanke visited Indiana yesterday and gave a nice primer on the machinations of the Federal Reserve. The Federal Reserve Chair put forward answers to these five questions: 1) What are the Fed's objectives, and how is it trying to meet them? 2) What's the relationship between the Fed's monetary policy and the fiscal decisions of the Administration and the Congress? 3) What is the risk that the Fed's accommodative monetary policy will lead to inflation? 4) How does the Fed's monetary policy affect savers and investors? 5) How is the Federal Reserve held accountable in our democratic society? Bernanke's answers might serve as a mini-textbook for economics and public policy students. For example, here's an excerpt from his answer to the second question: As I have discussed, monetary policy is the responsibility of the Federal Reserve--or, more specifically, the Federal Open Market Committee, which includes members of the Federal Reserve's Board of Governors and presidents of Federal Reserve Banks. Unlike fiscal policy, monetary policy does not involve any taxation, transfer payments, or purchases of goods and services. Instead, as I mentioned, monetary policy mainly involves the purchase and sale of securities. The securities that the Fed purchases in the conduct of monetary policy are held in our portfolio and earn interest. The great bulk of these interest earnings is sent to the Treasury, thereby helping reduce the government deficit. In the past three years, the Fed remitted $200 billion to the federal government. Ultimately, the securities held by the Fed will mature or will be sold back into the market. So the odds are high that the purchase programs that the Fed has undertaken in support of the recovery will end up reducing, not increasing, the federal debt, both through the interest earnings we send the Treasury and because a stronger economy tends to lead to higher tax revenues and reduced government spending (on unemployment benefits, for example). Even though our activities are likely to result in a lower national debt over the long term, I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it's worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues. Would such a step lead to better fiscal outcomes? It seems likely that a significant widening of the deficit--which would make the needed fiscal actions even more difficult and painful--would worsen rather than improve the prospects for a comprehensive fiscal solution. I certainly don't underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the Administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year. According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the Administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations, an outcome that would have extremely negative consequences for the country for years to come. Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery. Read the full speech here .