Online resources for teachers can be found on the Board's website at federalreserve.gov, and additional resources available throughout the System are at federalreserveeducation.org. The websites include videos in which policymakers and the staff describe the Fed's functions. Also, the sites include historical materials and a wealth of information related to the financial crisis and the Fed's response. So let me leave it there, and again thank teachers for participating in this town hall, and offer my thanks, on behalf of the Board of Governors, for the valuable work you do every day. And now I would be very happy to respond to your questions.
CHRISTINE PEDERSEN. Hi. I'm Christine Pedersen with Varina High School, Henrico, Virginia. And I wondered how you would answer if a student asked you: “Why should I care what the Federal Reserve does and what does it really matter to me?”
CHAIR YELLEN. Well, thanks for that question and it's a great question. And I think it is very important for students to understand that the Federal Reserve plays a key role in making sure the economy functions well for them so they can get ahead economically and they're not faced with encountering unnecessary obstacles that could interfere with their ability to realize their dreams and aspirations.
More specifically, we play an important role in making sure that financial markets work and treat consumers fairly. So, households and businesses have access to credit on fair and equal terms. It's important for people to be able to conduct transactions safely and easily and we play a key role in making sure that the payment system functions effectively.
Very importantly for students, we try to make sure that the job market is strong so that students entering it will have a wealth of job opportunities. Now, we can't guarantee that exactly the job a student wants is going to be available in the specific place that the student would like that job to be. But we do work to make sure that unemployment is low and job opportunities plentiful. And we try to keep inflation low and stable. And that's something that is important to savers who are concerned about providing for their retirement. And it's also important for those who take on debts and want to make sure that they'll have the capacity to repay them. And if there's a general deflation, falling wages and prices, people can, and in decades past have, become drowned in debt.
Now we achieve these goals by adjusting interest rates. And the level of interest rates and changes affect many in the economy. It affects the amount that borrowers have to pay on loans that they take out, and it also affects what savers earn. I can tell you that I hear from both of those groups. And it's important for people to understand when we adjust interest rates we're not trying to advantage or to disadvantage one group of savers or borrowers relative to another. What we're trying to do is to keep the economy strong, which benefits everyone in it. Now, if we're doing our work successfully, our hope is that the economy will generally function well.
If that's happening, instead of being on page 1 we can be back on page 19 in the newspapers not in the headlines and it's — I often think about the Fed's role as akin to plumbing in one's house. If it works well, it's something you really don't spend a lot of time thinking about. If it's not working well, it's a major problem. So, we are concerned with the economy’s plumbing and we want to make sure it works well. And I would say finally, I think it's important for students to realize the Fed is working on their behalf. We're an institution that is working on behalf of Main Street and not on Wall Street and that's sometimes a misperception.
AMY HENNESSY. Thank you so much. So we will take another question from a teacher in the room.
DAVID STEELE. Thanks for having us here this evening Madam Chair. I'm David Steele with Indiana University's Kelley School of Business. My question, I know you're a teacher yourself and have been in the past. My question is, could you provide some insight if you found yourself back in the classroom teaching at the undergraduate level these days, what we should be teaching our students about business and economics beyond their traditional and what I think many times are outdated money and banking curriculum courses. In other words, how would you begin thinking about the design of a course to get students excited about the Federal Reserve System — especially the millennial students that we're teaching these days? And I think you're doing a terrific job, by the way.
CHAIR YELLEN. Thank you so much for that. Well, I used to teach money and banking but it's been awhile. I think the core topics that would show up in the money bank — money and banking course usually that would involve a discussion of financial institutions and their various roles, how financial markets work, interest rates are determined, the yield curve, the role of central banks, how they operate, and the transmission mechanism through which monetary policy impacts the economy. These are important topics. They are core to a course like money and banking and I think they do need to remain part of a relevant curriculum. But I would update that curriculum relative to at least the last time I taught it which was before the financial crisis. And I would emphasize two new topics.
First, I would talk about financial crises and I would talk about the role of central banks including the Federal Reserve as serving as a lender of last resort. And the second topic I would be certain to include, we cover what I'll call unconventional monetary policy and the importance of the so-called zero lower bound, which is the short-term overnight interest rates which are the traditional tools of the Fed and central bankers can't move much below zero.
So let me start with financial crisis. I would explain how they can occur, what their key characteristics are, and the consequences they have for the real economy. Of course I would talk about our recent financial crisis.
It was the first to afflict the U.S. economy since the Great Depression and it's an event that impacted the lives of every millennial and impacted the lives of every American. You know, every financial crisis has some unique elements and I think I would discuss what some of those unique characteristics were of our recent financial crisis related to housing, markets, subprime mortgages, complex securitizations, credit default swaps, the rating agencies, money market funds and their special vulnerabilities.
Those things were unique to this crisis and I think it's worth students understanding that. But equally or more important, I would stress that financial crises all have a lot in common and that's true wherever and whenever they occur. And in particular what a financial crisis is a spreading panic. It's a situation where the troubles that are evident at one or few important institutions begin to create a much more generalized fear about the soundness of financial institutions in general.
And those fears lead financial institutions to begin to be fearful about lending to one another. They begin to withdraw liquidity and credit from one another and in extreme cases also lead to depositors or customers lining up outside banks trying to withdraw their funds. It's a general — it's — it involves — a financial crisis always involves a general run on the financial system and a drying up of liquidity. And since I want to make sure students understand about the Federal Reserve and central banks more generally that would take us to the role of the Federal Reserve.
I think for most of the time that I taught money and banking and macroeconomics, the Fed's role as a socalled lender of last resort wasn't terribly important. The Great Depression was really the last time we had had a financial crisis and a run on the banking system. But the truth is that the Fed was founded, legislation was 1913, in 1907 there had been a banking panic which just led to a downturn in the economy. Liquidity was provided by a group of private lenders headed by J.P. Morgan.
So the Fed's willingness to lend-- historically, it was to banking institutions when they were short of funds — that willingness to lend means those institutions don't have to turn around and take the assets on your balance sheet that tend to be illiquid and begin to sell them at fire sale prices driving down the capital of all the banking institutions. And they don't have to begin pulling back credit from households and businesses in the economy. Now, typically you have a recession following the financial crisis because, to some extent, those things occur. And this last crisis was absolutely no exception and as you know we had a very serious and prolonged recession.
But it is important to realize that the Fed's ability to serve as a lender of last resort prevented outcomes that would, could, and would have been far worse. It stopped credit from drying up to the private sector entirely. I think, I would explain that the financial system has evolved to a great deal since the Fed was founded and now we have a financial system with many bank-like institutions where they operate somewhat similarly to banks and provide credit to the economy but they're not depository institutions. And these, I would call them shadow banks, more generally can be vulnerable to runs and they’re important suppliers of credit. Because initially, the Fed system was designed to lend to banking organizations, we had to be very creative and inventive during the financial crisis to figure out how to channel liquidity to shadow banks to make sure the financial system didn't collapsed and the credit didn't dry up and reinvented a lot of programs.
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