expensive to raise funds because once trust is broken, fewer investors are willing to participate, and those who remain demand a premium for the increased risk of being misled. a lack of reliable information also leads investors to make poor investment decisions, so capital is misallocated. in short, financial markets operate less efficiently, with fewer benefits for everyone. avoiding a widespread loss of trust requires a systematic and coordinated effort to fix the flaws and weaknesses that can undermine investor confidence. it is important that there be a set of reasonable rules — so that chief executives, boards, and their auditors truly and fairly disclose the financial position of public companies — and that the investing public can rely on the truth, fairness, and completeness of that disclosure. now, in spite of the specific flaws that the enron collapse has revealed, it has become clear that much of the public ’ s confidence in the efficient operation of financial markets remains intact. but we must continue to be vigilant. restoring confidence financial statements form the foundation on which financial markets operate. i have already spoken of the way that a clear yardstick has helped the bank improve its transparency. the same idea holds true for financial statements. clear and accurate corporate reporting, together with other reliable information for investors, are essential. equally importantly, information must be presented in a straightforward manner. earnings reports should be used to disclose information, not bury it. we can ’ t pretend that hundreds of complicated pages lead to the type of disclosure that facilitates efficiency. next, confidence must be constantly earned by corporate managers and directors, auditors, analysts and investment advisors, rating agencies and regulators. reputations have been threatened by events like enron, and by the suspicion that some insiders have been feathering their nests at the expense of shareholders. obviously, it is wrong for analysts who actively own shares in a firm to use their assessments to promote that firm. but there can be more subtle conflicts of interest that don ’ t involve illegal or fraudulent activity — for example, auditors who are not truly independent of the companies they audit. risk assessment is another issue that needs more attention, particularly by companies outside the financial sector. this involves more than just listing in a financial filing all the things that could go wrong. companies need to tell investors how they are handling both the external risks that they face and the risks they have chosen to take on as part of their business strategy. after all, investors are required to sign a form that tells their broker about their risk

transparency. the economic benefits of establishing trust during the 1970s and 1980s, the bank of canada had ample experience with operating in an environment where canadians had significantly less confidence in the bank ’ s ability to safeguard the domestic value of the currency. inflation was choppy and unpredictable, and the bank of canada was struggling to come up with an appropriate anchor for monetary policy. however, in recent years, canadians have gained confidence that we will keep inflation low, stable, and predictable, thanks to our system of explicit inflation targets and our success in meeting them. this trust can be thought of as a kind of social capital — a shared asset that benefits everyone, including the central bank. this capital is very valuable and must not be squandered. what does this have to do with efficiency? quite a bit. if you think back to the 1970s and 1980s, people spent a great deal of time and effort trying to hedge against inflation. resources that should have been put to more productive uses were spent devising ways to protect the value of savings. then, in 1991, the government of canada and the bank agreed on a system of explicit inflationcontrol targets. as you may know, under the current agreement our target is the 2 per cent midpoint of a 1 to 3 per cent band for the total consumer price index. since we adopted this inflation - control system we have been consistently successful in meeting the target. as a result, inflation expectations have fallen in line with the target and are now well anchored, not just for the near term, but well into the future. with this trust in place, this social capital earned, the list of economic benefits for canada is long indeed. less time, energy, and money is being spent on protecting oneself against inflation. labour and financial contracts have lengthened, while the amount of time lost to strikes and lockouts has dropped. what is more, the dynamics of the inflation process have been changed, to the point that inflation itself has become much more stable and predictable. inflation expectations are less vulnerable to swings in the external value of the canadian dollar, and to changes in key energy prices. all this allows the bank to conduct monetary policy more easily. and it allows financial markets and businesses to operate more efficiently. of course, the economy has also undergone a number of other necessary changes, including a massive restructuring of the private sector and a restoration of fiscal health. together, these changes have led to better economic performance. transparency supports the system before i move on