the time comes to ensure that inflation stays low and inflation expectations well anchored. as always, my comments represent my own views and opinions, not necessarily those of the federal open market committee or the federal reserve system. with the benefit of hindsight, it is clear that the fed and other regulators, both here and abroad, did not sufficiently understand some of the critical vulnerabilities in the financial system, including the consequences of inappropriate incentives, and the opacity and the large number of self - amplifying mechanisms that were embedded within the system. likewise, we did not appreciate all the ramifications of the growth of the shadow banking system and its linkage back to regulated financial institutions until after the crisis began. of course, understanding now what we did not understand then is only half the battle. we need to respond to ensure that ongoing changes in our financial system do not threaten the stability of the financial system in the future. for one, the crisis is provoking a reevaluation of our views on how to respond to asset bubbles. for years, central bank orthodoxy has been that you cannot identify asset bubbles very well. thus, the strategy has been to move aggressively to clean up such bubbles after they have burst. i think our level of confidence in that approach has been considerably reduced in the wake of the crisis that we have just experienced. the costs of cleaning up after the fact have been immense. but make no mistake – developing an effective, more proactive approach is not easy. among the important questions that need to be answered : 1. how does one identify bubbles – which i ’ ll define here as persistent large deviations in asset prices from their fundamental value – in real time? 2. what instruments can be used to limit the development of bubbles and / or allow bubbles to deflate in non - catastrophic ways that will not damage the economy in other ways? turning to the first issue, identifying asset bubbles in real time is difficult. however, identifying variables that often are associated with asset bubbles – especially credit asset bubbles – may be less daunting. to take one recent example, there was a tremendous increase in financial leverage in the u. s. financial system over the period from 2003 to 2007, particularly in the nonbank financial sector. this sharp rise in leverage was observable. presumably, this rise in leverage also raised the risks of a financial asset bubble and the impact of this bubble on housing certainly raised the stakes for the real economy if such a

a small fraction of this depreciation will be against the canadian dollar and will occur late in the projection period. there are both upside and downside risks to the bank's projection for growth and inflation. the bank judges that these risks are roughly balanced, with a small tilt to the downside later in the projection period, related to a possible disorderly correction of global imbalances. we consider this risk to be slightly smaller than previously judged, given the tentative signs of policy adjustments in some countries and of rotation in global demand. in line with the bank's outlook for the canadian economy and its current assessment of risks, some modest further increase in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target over the medium term. we will closely monitor evolving economic developments in the canadian economy in light of the cumulative increase in the policy interest rate since last september. mr. chairman, i want to emphasize that what we have laid out in our april mpr is a projection for growth and inflation based on the assumptions that i have noted above. we publish our projection so that canadians and financial markets know the basis against which the bank judges all new economic developments. when we set our policy interest rate eight times a year, we assess all available information on the global and canadian economies relative to our base - case projection and then make our monetary policy decisions.