mortgages, we should all recognize that the trigger could have come from a wide range of sources. the social and economic costs of the events in the subprime market are concentrated in the united states, while the financial costs are both widely dispersed and – relative to the scale of the system – readily absorbable. in short, as painful as they are to those affected, subprime losses have been important primarily because they have revealed deeper flaws in the financial system. while a number of underlying causes can be identified, i will concentrate on three in particular. the first relates to liquidity. in recent years, market participants were overly confident that liquid markets would continually provide an outlet for new products and represent an ongoing source of funding liquidity for financial institutions. ample market liquidity had its origins in benign macroeconomic conditions, low and relatively stable long - term interest rates, financial indeed, central banks had been discussing the possibility of a repricing of risk for some time. see " developments and trends, " financial system review ( ottawa : bank of canada, june 2004 ) : 4 - 5. innovation, and the broadening list of financial market participants. ultimately sowing the seeds of its own demise, market liquidity fed a supreme confidence in the ability to sell holdings at prices that matched mark - to - model valuations. this overconfidence encouraged the rapid growth of the " originate - to - distribute " credit model. in this model, the borrower often became separated from the end investor by several transactions, as credit risk was repackaged, tiered, securitized, and distributed. many originators and distributors felt confident that long - term credit risk had been transformed into short - term " warehouse " risk prior to distribution and that distribution itself was irrevocable. others knew that they had not fully eliminated these risks, but felt they could get out in time. such confidence was misplaced. risk had not disappeared, it had merely been redistributed, and that distribution was often not final. the current market disruptions represent, in part, the painful process of finding out where that risk ultimately lies. liquidity was also the achilles heel of many asset - backed commercial paper ( abcp ) programs and structured investment vehicles. in many such vehicles, medium - term, illiquid, hard - to - value assets were funded by short - term money market securities at yields only marginally higher than those offered by the most liquid, transparent

rate of rise in the cost of benefits that employers provide to workers has been remarkably subdued over the past few years, although a gradual upward tilt has become evident of late. a variety of factors - - including the strength of the economy and rising equity values, which have reduced the need for payments into unemployment trust funds and pension plans, and the restructuring of the health care sector - - have been working to keep benefit costs in check in this expansion. but, in the medical area at least, the most recent developments suggest that the favorable trend may have run its course. the slowing of price increases for medical services seems to have come to a halt, at least for a time, and, with the cost - saving shift to managed care having been largely completed, the potential for businesses to achieve further savings in that regard appears to be rather limited at this point. there have been a few striking instances this past year of employers boosting outlays for health benefits by substantial amounts. a couple of years ago - - almost at the same time that increases in total hourly compensation began trending up in nominal terms - - evidence of a long - awaited pickup in the growth of labor productivity began to show through more strongly in the data ; and this accelerated increase in output per hour has enabled firms to meet workers ’ real wage demands while holding the line on price increases. gains in productivity usually vary with the strength of the economy, and the favorable results that we have observed during the past two years or so, when the economy has been growing more rapidly, surely overstate the degree of pickup that can be sustained. but evidence continues to mount that the trend has picked up, even if the extent of that improvement is as yet unclear. signs of a major technological transformation of the economy are all around us, and the benefits are evident not only in high - tech industries but also in production processes that have long been part of our industrial economy. notwithstanding a reasonably optimistic interpretation of the recent productivity numbers, it would not be prudent to assume that rising productivity, by itself, can ensure a non - inflationary future. certainly wage increases, per se, are not inflationary. to be avoided are those that exceed productivity growth, thereby creating pressure for inflationary price increases that can eventually undermine economic growth and employment. because the level of productivity is tied to an important degree to the physical stock of capital, which turns over only gradually, increases in the trend growth of productivity probably also occur rather gradually. by contrast,