mark carney : what are banks really for? remarks by mr mark carney, governor of the bank of canada, to the university of alberta school of business, edmonton, alberta, 30 march 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * across the world's major economies, addressing the failures of banking ranks among the highest policy priorities. in the harsh glare of the current financial turmoil, it is clear that many banks outside of canada were either not doing their jobs or were doing them in ways that created enormous risks. it is vital that we learn from these mistakes to build a more robust financial order. the financial system should be the servant of the real economy. as one of my international colleagues recently remarked, " it is time the banks stopped swanning around like the queen of england and resumed their traditional role as handmaidens to industry. " it is apparent that an era of self - absorbed finance that viewed itself as the apex of economic activity led to widespread misallocation of capital. now, in some major economies, the challenge is that banks are not allocating capital at all. around the world, banks are accused of not lending enough, charging too aggressively when they do lend and, most fundamentally, of deepening the recession rather than dampening it. these concerns are much less valid in canada than abroad, but we too should reflect upon them and respond accordingly. my remarks today will address the role of banks and markets in our economy. in recent years, these core elements of our financial system became increasingly intertwined, with each expanding into the traditional role of the other, and each reliant on the health of the other. this blurring between banks and markets led to the emergence of the so - called " shadow banking " sector, whose presence helped trigger the crisis and whose absence will complicate the recovery. we now face important policy questions about which activities banks should perform, which should be located in sustainable, continuously - open markets, and which should be prohibited. the final answers to these questions require reflection and implementation will take time, but broad direction is needed now. markets are overshooting. on the current trajectory, virtually all financial activities will be put back onto bank balance sheets at potentially tremendous cost in terms of lost output and employment. restoring stability to financial markets requires broad direction on the type of global financial system that should emerge from the current financial mess

be sure, our understanding of the forces that drive inflation is imperfect, and we recognize that this year ’ s low inflation could reflect something more persistent than is reflected in our baseline projections. the fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on. let me mention a few possibilities of more fundamental influences. 1 first, given that estimates of the natural rate of unemployment are so uncertain, it is possible that there is more slack in u. s. labor markets than is commonly recognized, which may be true for some other advanced economies as well. if so, some further tightening in the labor market might be needed to lift inflation back to 2 percent. second, some measures of longer - term inflation expectations have edged lower over the past few years in several major economies, and it remains an open question whether these measures might be reflecting a true decline in expectations that is broad enough to be affecting actual inflation outcomes. third, our framework for understanding inflation dynamics could be misspecified in some way. for example, global developments — perhaps technological in nature, such as the tremendous growth of online shopping — could be helping to hold down inflation in a persistent way in many countries. or there could be sector - specific developments — such as the subdued rise in medical prices in the united states in recent years — that are not typically included in aggregate inflation equations but which have contributed to lower inflation. such global and sectoral developments could continue to be important restraining influences on inflation. of course, there are also risks that could unexpectedly boost inflation more rapidly than expected, such as resource utilization having a stronger influence when the economy is running closer to full capacity. in this economic environment, with ongoing improvements in labor market conditions and softness in inflation that is expected to be temporary, the fomc has continued its policy of gradual policy normalization. as the committee announced after our september meeting, we are initiating our balance sheet normalization program this month. that program, which was described in the june addendum to the policy normalization principles and plans, will gradually scale back our reinvestments of proceeds from maturing treasury securities and principal payments from agency securities. as a result, our balance sheet will decline gradually and predictably. 2 by limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against outsized moves in interest rates and other potential market strains