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Following an extended boom in housing, the demand for homes began to weaken in mid-2005. By the middle of 2006, sales of both new and existing homes had fallen about 15 percent below their peak levels. Homebuilders responded to the fall in demand by sharply curtailing construction.

Growth in U.S. real imports slowed to about 3 percent in 2006, in part reflecting a drop in real terms in imports of crude oil and petroleum products.

Rents should begin to decelerate as the demand for owner-occupied housing stabilizes and the supply of rental units increases.

To be sure, faster growth in nominal labor compensation does not necessarily portend higher inflation.

Since World War II, inflation - the apparently inexorable rise in the prices of goods and services - has been the bane of central bankers.

Deflation is defined as a general decline in prices, with emphasis on the word 'general.'

Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation.

The failure of Lehman Brothers demonstrated that liquidity provision by the Federal Reserve would not be sufficient to stop the crisis; substantial fiscal resources were necessary.

To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses; but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability.

Among other objectives, liquidity guidelines must take into account the risks that inadequate liquidity planning by major financial firms pose for the broader financial system, and they must ensure that these firms do not become excessively reliant on liquidity support from the central bank.

The role of liquidity in systemic events provides yet another reason why, in the future, a more system wide or macroprudential approach to regulation is needed.

Long-term unemployment is particularly costly to those directly affected, of course. But in addition, because of its negative effects on workers' skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy.

In any given month, a large number of workers are being hired or are leaving their current jobs, illustrating the dynamism of the U.S. labor market.

Because a person has to be either working or looking for work to be counted as part of the labor force, an increase in the number of people too discouraged to continue their search for work would reduce the unemployment rate, all else being equal - but not for a positive reason.

The children of the unemployed achieve less in school and appear to have reduced long-term earnings prospects.

For many of us, owning a home signaled a passage into adulthood that coincided with the start of a career and family.

High levels of homeownership have been shown to foster greater involvement in school and civic organizations, higher graduation rates, and greater neighborhood stability.

Home purchases that are very highly leveraged or unaffordable subject the borrower and lender to a great deal of risk. Moreover, even in a strong economy, unforeseen life events and risks in local real estate markets make highly leveraged borrowers vulnerable.

Now that I'm a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers.

Certainly, 9 percent unemployment and very slow growth is not a good situation.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment.

Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be.

Only a strong economy can create higher asset values and sustainably good returns for savers.

The Federal Reserve Act requires the Federal Reserve to report annually on its operations and to publish its balance sheet weekly.

The Fed's policy choices can always be debated, but the quality and commitment of the Federal Reserve as a public institution is second to none, and I am proud to lead it.

Small businesses have played an important role in fueling past economic recoveries.

Community development has a long history of innovation and learning from experience.

The movement toward a holistic approach to community development has been long in the making, but the housing crisis has motivated further progress.

For practitioners of community development, as in any field, joining a network of like-minded professionals is important for building skills and becoming aware of opportunities and resources.

Neighborhoods and communities are complex organisms that will be resilient only if they are healthy along a number of interrelated dimensions, much as a human body cannot be healthy without adequate air, water, rest, and food.

Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times.

No economy can succeed without a high-quality workforce, particularly in an age of globalization and technical change.

The decline in home equity makes it more difficult for struggling homeowners to refinance and reduces the financial incentive of stressed borrowers to remain in their homes.

Consumers going through foreclosure typically will see their credit scores drop, raising longer-term questions about their ability to rebound financially and perhaps pursue a more sustainable home purchase at some later point.

Smart financial planning - such as budgeting, saving for emergencies, and preparing for retirement - can help households enjoy better lives while weathering financial shocks. Financial education can play a key role in getting to these outcomes.

Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear.

When the economic well-being of their nation demanded a strong and creative response, my colleagues at the Federal Reserve... mustered the moral courage to do what was necessary.

In the typical economic recovery, a resurgent housing sector helps fuel reemployment and rising incomes.

Many foreclosed homes are neglected or abandoned, as legal proceedings or other factors delay their resale. Deteriorating or vacant properties can, in turn, directly affect the quality of life in a neighborhood, for example, by leading to increases in vandalism or crime.

I am particularly pleased to see that the Bendheim Center for Finance is thriving.

Economic science concerns itself primarily with theoretical and empirical generalizations about the behavior of individuals, institutions, markets, and national economies. Most academic research falls in this category.

Economic engineering is about the design and analysis of frameworks for achieving specific economic objectives.

Economic management involves the operation of economic frameworks in real time - for example, in the private sector, the management of complex financial institutions or, in the public sector, the day-to-day supervision of those institutions.

The one thing people don't appreciate, I think, is that central banking is not a new development. It's been around for a very long time.

To achieve a more balanced international system over time, countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals.

In a mature economy like India's, which is becoming modern and a financially-oriented economy, an independent central bank, responsible central bank, is really central to success.

Preventing liquidation of an unbalanced market will leave you in tears.

Uncertainty is seen to retard investment independently of considerations of risk or expected return.

Different countries have different kinds of financial structures.

The Mexican debt crisis, Latin American debt crisis, the crises of the 1990s, the Wall Street stock market crash, and other events should have reminded us, and did remind us, that financial instability remains a concern, remains a problem.

The ultimate purpose of economics, of course, is to understand and promote the enhancement of well-being.

I don't think there are any students who should not be exposed to a basic financial literacy course.

Achieving price stability is not only important in itself, it is also central to attaining the Federal Reserve's other mandate objectives of maximum sustainable employment and moderate long-term interest rates.

Every effort needs to be made to try and offset the costs of Katrina and Rita by reductions in other government programs, especially those that are wasteful, duplicative and ineffective.

I assure this committee that, if I am confirmed, I will be strictly independent of all political influences... essential to that institution's ability to function effectively and achieve its mandated objectives.

If I am confirmed, I am confident that my colleagues on the Federal Open Market Committee and I will maintain the focus on long-term price stability as monetary policy's greatest contribution to general economic prosperity and maximum employment.

Our mission, as set forth by the Congress is a critical one: to preserve price stability, to foster maximum sustainable growth in output and employment, and to promote a stable and efficient financial system that serves all Americans well and fairly.

I come from Main Street, from a small town that's really depressed.

It's the price of success: people start to think you're omnipotent.

How much would you pay to avoid a second Depression?

It's true that the Federal Reserve faces a lot of political pressure and is unpopular in many circles.

The Federal Reserve's job is to do the right thing, to take the long-run interest of the economy to heart, and that sometimes means being unpopular. But we have to do the right thing.

I think one of the lessons of the Depression - and this is something that Franklin Roosevelt demonstrated - was that when orthodoxy fails, then you need to try new things. And he was very willing to try unorthodox approaches when the orthodox approach had shown that it was not adequate.

If you want to understand geology, study earthquakes. If you want to understand the economy, study the Depression.

I served seven years as the chair of the Princeton economics department where I had responsibility for major policy decisions, such as whether to serve bagels or doughnuts at the department coffee hour.

The Federal Reserve can only buy Treasuries and agencies, and moreover quantitative easing typically involves buying longer-term Treasuries and agencies in terms of bills, for example.

Monetary policy cannot do much about long-run growth, all we can try to do is to try to smooth out periods where the economy is depressed because of lack of demand.

A gold standard doesn't imply stability in the prices of the goods and services that people buy every day, it implies a stability in the price of gold itself.

The more guidance a central bank can provide the public about how policy is likely to evolve the greater the chance that market participants will make appropriate inferences.

The benefit of appointing a hawkish central banker is the increased inflation-fighting credibility that such an appointment brings.

Developments in financial markets can have broad economic effects felt by many outside the markets.

In the future, my communications with the public and with the markets will be entirely through regular and formal channels.

The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare.

The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis.

I've never been on Wall Street. And I care about Wall Street for one reason and one reason only because what happens on Wall Street matters to Main Street.

The American people are among the most productive in the world. We have the best technologies. We have great universities. We have entrepreneurs.

The amount of currency in circulation is not changing. The money supply is not changing in any significant way.

It takes about two and a half percent growth just to keep unemployment stable.

The tax code is very inefficient. Both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest.

The central bank needs to be able to make policy without short term political concerns.

It must be awfully frustrating to get a small raise at work and then have it all eaten by a higher cost of commuting.

I am very proud of my nerd-dom.

In fact, the world needs more nerds.

Importantly, in the 1930s, in the Great Depression, the Federal Reserve, despite its mandate, was quite passive and, as a result, financial crisis became very severe, lasted essentially from 1929 to 1933.

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