Finance Committee on Dec. 5th, 2007

[Mark Carney]

No. You're referring to a very technical point, general market disruption, which is a term of art of lawyers in liquidity agreements for these asset-backed CPs, and there's a very wide range of it. This has nothing to do with that.

On your question about bailing out, I want to repeat what I said earlier. It is extremely important that financial market participants bear the consequences of their decisions, and this is one aspect that has to be balanced. What we have to make sure is that the consequences of the difficulty in financial markets don't fall on the shoulders of all Canadians when trying to teach a really harsh lesson to those participants.

Is the regulatory system up to it? It's a very important point. I said in my remarks, and I believe it's fundamental, that one of the advantages of the Canadian system is the degree of cooperation among the principals: OSFI, the Bank of Canada, the Department of Finance, CDIC, and, importantly, the provincial securities commissions.

Some of this is legislated, but it is a question in practice where people get together, talk about issues, meet regularly, and work in a cooperative fashion. We need that, or we may need it, in the coming months.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Monsieur St-Cyr, you have five minutes.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you, Mr. Chairman and Mr. Carney.

I want to pursue the line of questioning with respect to the volatility of the exchange rate and the high Canadian dollar overall, because this has important repercussions—everyone agrees on that—for the manufacturing industry, but also the farming industry and a number of other sectors. It also has significant consequences for the tourist industry.

If I understood you correctly, you believe the Bank of Canada's fundamental role is to continue to pursue inflation control. I take from that that the problem should resolve itself. However, other banks across the world are succeeding fairly well. They influence exchange rates by using interest rates and their monetary reserves to purchase or sell currencies. I'm wondering whether the Bank could at least consider that type of intervention.

It seems to me that we should be seriously considering the possibility of a monetary union, as suggested by some, albeit outside considerations that are often more emotional than they are rational. We saw this with Mr. McCallum's comments earlier, when he made the connection between this issue and sovereigntists, when in fact Mr. Jarislowsky—who is not known as a hard-core sovereignist, was the one who came before us to talk about monetary union. There is a monetary union in Europe.

Mr. Jarislowsky also talked about another solution, which would be to establish a target range, a little like what is done for inflation control. We say it should be 2 per cent, or midway between 1 and 3 per cent. Could the Bank consider the option of having a target range, saying that it would like to see the dollar at 80¢, plus or minus 10¢, and intervene on that basis? Is this something that you could look at and that we could debate outside of what are often more sentimental or emotional, as opposed to rational, considerations?

[Mark Carney]

Thank you for those questions.

First of all, the Bank of Canada's intervention policy continues to be an option in Canada. Although rarely used—I believe that is correct—it is nevertheless an option. We can intervene in cases of market failures or when the value of our currency could have a serious impact on our mid-term economic prospects.

Second, history has shown us that if an intervention is not accompanied by other measures, it just doesn't work. If it only has an effect for a day or a week, it will be a failure. All that does is put money in the pockets of speculators, in my opinion.

Another very important question has to do with monetary union, which involves a lot of disadvantages. It has the advantage of reducing transaction costs, but the disadvantage is that it leads to a loss of monetary sovereignty. Monetary sovereignty is important for economies which are very different, such as those of Canada and the U.S. There is a greater difference between Canada and the United States than there is with France or Germany, for example. Another disadvantage of monetary union is that the Bank would lose its accountability. Financial stability raises certain issues, particularly the matter of who will act as the lender of last resort.

I was living in Europe at the time the euro was adopted and I know a number of executives who were involved in that process. The pooling of sovereignty was a major political issue. It was a way of achieving political union among the countries. The choice of the euro is more of a political choice than it is an economic choice.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

It's sovereignty-association.

[The Chair, Conservative, Rob Merrifield]

I'm sorry, but your time has gone. We'll move to Mr. Dykstra.

Mr. Dykstra, you have five minutes.

[Rick Dykstra, Conservative, St. Catharines, ON]

Through you, Chair, to Mr. Carney, I'm sorry to take some of the time, as that sounded like a good conversation.

I have a couple of questions. We certainly recognize that the Bank of Canada has responsibility for monetary policy and that there are certain tools the bank has to affect the value of the dollar. Obviously, it will be up to you, when you do become the governor of the bank, to choose to exercise them or not. We also recognize—although some folks on the other side of the table may not agree—quite frankly, that monetary policy is complex and that it's certainly best left in the hands of the governor.

A couple of issues we have tried to benchmark as a government are transparency and accountability and trying to ensure a new culture of openness with respect to government. I wonder if you could comment or commit to this committee that those approaches are ones you'll also endeavour to continue at the bank.

[Mark Carney]

Thank you very much for the question.

This point about transparency and openness and open communication is extremely important. Part of what I mentioned in my remarks was the importance of expectations in driving monetary policy.

We had an earlier conversation about expectations grouping around 2%. I think experience has shown that it doesn't just matter that inflation is 2%. The conduct of monetary policy doesn't just matter; it's how you get there and how well people understand how you get there. And the way you encourage that is through dialogue such as this and other outreach efforts. So transparency is a huge element of that. It's been a hallmark of the Bank of Canada.

We need to continue to look at ways to further enhance that and to further improve our communication. We need to further improve—and we do look at—our regular publications, including our Monetary Policy Report perhaps. I will give you some examples of things that one could look at, including looking back at previous decisions and what the expectations were and, more explicitly, saying what the bank's expectations were, and how things turned out and why things were different. There's an accountability element there.

The other element some banks have looked at—and it's more difficult to do this in a consensus-driven organization, but still possible—is the publication of minutes following decisions. So with a lag, the publication of minutes gives a better sense of the range of possible outcomes and the range of considerations that were given to a decision. The Reserve Bank of Australia, for example, last week just announced they will do that as well.

An extreme version of this is the publication of an interest rate forecast. I don't think that fully makes sense, but it's something that one looks at in a fuller review of the inflation-targeting framework.

A last point, if I may, would be to put in a little plug for a website, www.inflationtargeting.ca. I know you all have it in your bookmarks. That is the website of our research program that I alluded to at the start. We want to use that as a forum for open discussion or wiki-type discussions and serious research, but also practical discussion of the next framework we would be discussing for four years' time.

Thank you.

[Rick Dykstra, Conservative, St. Catharines, ON]

Well, I think it's interesting to see the obvious coming of age of the Bank of Canada if its next governor gives a plug for its website, in terms of what you're looking at.

[Some hon. members]

Oh, oh!

[Rick Dykstra, Conservative, St. Catharines, ON]

That's great.

One of the things you noted in your opening remarks—and I know you didn't have a whole lot of time to do this—was the whole aspect of deterring counterfeiting through bank-note-related education, communication, and compliance. It's obviously an issue both within the country and in our external relations with other countries to try to make sure that counterfeiting is deterred, and the aspects of it that have weighed heavily upon countries over the last number of years.

I wonder if you could just comment a little further on your commitment to that and on working with the RCMP.

[Mark Carney]

Thank you very much.

This is very important. This goes right to the heart of confidence in money as a store of value and a unit of account. I'm sure most are aware that we underinvested in banknotes in the previous decade, and, partly as a consequence of that, counterfeiting spiked up in Canada to unacceptably high levels.

It's a bit like inflation. Once you let this get away from itself, you have to work really, really hard to get it down. What the current governor and the bank put in place a few years ago was a three-pronged strategy, part of which is education, part of which is working with crown prosecutors to make sure it's prosecuted, and part of which is working with law enforcement. I said a three-pronged strategy, but I meant four-pronged, because the other prong is higher-quality banknotes, which the bank has introduced, as you've no doubt seen.

There has been a very sharp fall in counterfeiting. It's still too high, though. It's headed in the right direction, and we're going to drive it all the way down, and then we're going to keep doing that.

The RCMP has been extremely effective in this. I will tell you that the current governor and I met with the commissioner and the deputy commissioners of the RCMP just last week to talk about the next steps in this process.

This is important, but the message I'd like to leave with you is that we're making real progress on this. As a last point on accountability, we have these figures on our website to show where progress is being made.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. Turner for five minutes.

[Garth Turner, Liberal, Halton, ON]

Mr. Carney, you've been called the architect of the Conservative government's income trust strategy, and I'm wondering if that's a fair characterization.

[Mark Carney]

I was a senior public servant, as you know, in the Department of Finance. Quite frankly, I was a senior public servant under the previous Liberal government and under the current Conservative government. I ran the last five budgets and all tax decisions that were put forth by both governments. I think it's safe to say I was involved, yes.

[Garth Turner, Liberal, Halton, ON]

In terms of income trusts, you basically gave the same advice to Finance Minister Goodale as you gave to Finance Minister Flaherty.

[Mark Carney]

I gave the best advice I could to both finance ministers.

[Garth Turner, Liberal, Halton, ON]

Was it similar?

[Mark Carney]

The advice of public servants to their ministers is covered by cabinet confidence. That's the way the system works, and I gave the best advice I could to those ministers.

[Garth Turner, Liberal, Halton, ON]

All right. A year after the decision, more than $40 billion in Canadian trusts have been sold, and it would appear the better part of a billion dollars' worth of tax revenue is not flowing into the government treasury as it was before.

Given that, I have two questions. One, did you anticipate the consequences of the advice you gave the minister? Secondly, how can you consider it to be anything other than a failure?

[Mark Carney]

I'll refer to my previous answer, which is that I'm not going to go into the details of advice given to any minister of finance or any minister of the crown that I gave as a public servant.

I will point out, though, as a macro fact, that over the course of the last year and a half, as I'm sure you're aware, the TSX, the largest market, is up substantially. We have a $1.6 trillion market cap on the TSX. It's important to keep context--

[Garth Turner, Liberal, Halton, ON]

I know that, and I'm not interested in the TSX--

[The Chair, Conservative, Rob Merrifield]

I'm sorry, Mr. Turner, allow Mr. Carney to finish answering the question.

[Garth Turner, Liberal, Halton, ON]

No, I'm not, because that's not what I asked him. He can answer a question I didn't ask him if he wants--

[The Chair, Conservative, Rob Merrifield]

Do you have another question, Mr. Turner?