- term relationship between originator and borrower contributed to a decline in credit quality. further, within several global financial institutions, there were also inappropriate incentives created by the funding of trading desks at risk - free rates and poorly designed compensation structures. there are now prominent calls for increased regulation to better align incentives within institutions. these matters require judgment, not slogans. i firmly believe that regulation of compensation is not appropriate, even though it is in vogue. rather, regulators should consider carefully compensation incentives within a broader assessment of the robustness of risk - management and internalcontrol systems. regulators also need to address misaligned incentives created by regulation itself, such as the current state of capital requirements. it goes without saying that liquidity management across a broad range of financial institutions must be improved. confidence that markets would remain liquid had encouraged the rapid growth of the " originate - to - distribute " credit model. the current illiquidity is hastening its demise. liquidity problems have spread across markets, reflecting both fundamental concerns about the solvency of counterparties and the procyclicality of collateral margins. core money markets have broken down as a result of these three failures, thereby worsening the crisis. had these core markets continued functioning, we would likely be experiencing a credit crunch – where the cost of credit would have been sharply higher – instead of a full - blown credit crisis – where credit is unavailable at any price across a range of core markets. while the provision of extraordinary liquidity by central banks is limiting the damage from the crisis, it has long been apparent that official liquidity, irrespective of size, cannot re - open markets on its own. how to build continuous markets the current situation is unacceptable. the financial system should have a number of core markets – including interbank lending, commercial paper, and repo markets for high - quality securities – that are continuously open even under stress. achieving this will require a combination of the microeconomic measures just described and the pursuit of two strategies. the g - 7 action plan announced last month provides the conventional roadmap. this strategy centres on shoring up systemically important institutions so that they can be more resilient and resume their market - making role. to this end, the g - 7 has made it clear that no systemically important institution will be allowed to fail and that sufficient capital – public and private – will be provided to restore confidence. in recent weeks, g - 7 governments have acted

david dodge : views on the canadian economy and monetary policy opening statement by mr david dodge, governor of the bank of canada, to the standing senate committee on banking, trade and commerce, ottawa, 3 may 2006. * * * good afternoon, mr. chairman and members of the committee. we appreciate the opportunity to meet with this committee twice a year, following the release of our monetary policy reports. these meetings help us keep senators and all canadians informed about the bank's views on the economy, and about the objective of monetary policy and the actions we take to achieve it. when paul and i appeared before this committee last october, we said that the global and canadian economies were continuing to grow at a solid pace, that our economy appeared to be operating at full production capacity, and that it would remain at capacity in 2006 and 2007. total and core inflation were projected to average close to 2 per cent, beginning in the second half of this year. this projection assumed oil prices at roughly us $ 64 per barrel, a level then indicated by futures prices. our projection also assumed stable commodity prices, government spending that was growing roughly in line with revenues, and a canadian dollar continuing to trade in a range of 85 to 87 cents u. s. in our april monetary policy report ( mpr ), we say that the global economy has shown a little more momentum than had been anticipated : oil prices have been roughly us $ 10 per barrel higher than assumed ; metals prices have risen significantly ; and the canadian dollar had been trading in a range of 85 1 / 2 to 88 a½ cents u. s. in our report, the bank projects economic growth of 3. 1 per cent in 2006, 3. 0 per cent in 2007, and 2. 9 per cent in 2008. total cpi inflation will continue to be volatile and affected by developments in the markets for crude oil and natural gas, and will average close to 2 per cent in 2007 and 2008 ( excluding the effect of any changes in the gst ). core inflation is projected to rise to 2 per cent in the second half of this year and remain there through to the end of 2008. this projection is based on three key assumptions : first, that energy prices will remain roughly as indicated by futures prices ; second, that canadian governments will continue to run budgets that are roughly in balance ; and third, that the orderly resolution of global imbalances will involve a gradual depreciation of the u. s. real effective exchange rate.