Finance Committee on March 10th, 2009

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I want to thank all of our guests today for coming this morning. I appreciate the comments from Mr. Siegel that you could move as soon as the budget gets passed, and we're hoping that happens expeditiously through the Senate.

The questions I have are for Ms. Dickson.

I was fortunate to be on the finance committee last year when you were in front of us talking about non-bank asset-backed paper. You had four or five actions that OSFI was going to be taking, and you concluded that the freezing of the non-bank ABCP market had rightfully led to a lot of questions. This was prior to what has happened with the ability to secure ties or sell the commercial paper that was available for car loans and leasing companies and so on, including the financial arms of the car manufacturers. But we're now hearing that has dried up and it's very difficult to get credit or be able to provide the cash to be able to provide those leases.

I may be concerned unnecessarily with the $12 billion in secured credit facility that we're offering in the budget, but here's where my dilemma is. We've had a problem with asset-backed paper, and we actually had a Montreal accord to try to solve that problem for investors. Then we had an economic downturn, and now we're talking about the need for asset-backed paper to be able to provide for—since you're here we'll use this example—the automotive community to move product off their lots.

What is OSFI's position on asset-backed paper? How does it relate to what has changed between what occurred last year when we had difficulties and the position we're in now? Do you have any comment for me to help me understand why everybody is coming to us?

I'm on the automotive subcommittee--I've been sitting in on those meetings--and every one of the manufacturers has been talking to us about providing this credit. They're very happy that this credit facility is in the budget and that this asset-backed approach to creating the cashflow to allow for leasing and selling is there.

From your perspective, can you tell me what I'm missing, and whether we did the right thing? Did we improve things so that this will work? That's my question.

[Julie Dickson]

I think in Canada and around the world there continues to be aversion to taking risk. Investors continue to be concerned about risk and they're being very careful in terms of what they invest in.

The Canadian bank ABCP market continues to perform, though certainly not as well as it did prior to the global market turmoil beginning in the summer of 2007. But you can understand why investors really do focus on where they're putting their money now. They tend to really like government securities. They tend to like Canadian banks. But the further down the list you go, the more coaxing they need to return to the market with the same vigour they had prior to August 2007.

[Mike Wallace, Conservative, Burlington, ON]

To follow up, in your report last year you talked about the private pension plans basically not being heavily exposed to the issue with the asset-backed paper. Sitting through the comments that I've been hearing over the last few weeks, I'm wondering why the pension plans for the automotive manufacturers.... The manufacturers say the asset-backed paper they're providing is a quality product because it's well secured with good assets.

Why are the pension plans, particularly their own pension plans, not interested in buying their own paper? Is that illegal, is it possible, or is it just because of the risk level?

[Julie Dickson]

I can't really talk about the plans that OSFI doesn't oversee. We oversee 10% of the private pension plans in Canada, and the provinces oversee 90%. I do know that the 10% we oversee have very conservative investment strategies.

[Mike Wallace, Conservative, Burlington, ON]

Based on that, you're saying that the facility that the Government of Canada is offering in this budget—even though I agree with it—has some risk to it in terms of those assets that we'd be buying on paper. We need to be there because of the risk level in today's marketplace, and they're relying on government to provide the insurance that it will happen. It will provide capital in the marketplace that's much required.

Is that what you're saying?

[Julie Dickson]

I'm not necessarily referring to the risk of the instrument; it's the investor's perception of the risk.

[Mike Wallace, Conservative, Burlington, ON]

Okay.

Do I have any more time?

[The Chair, Conservative, James Rajotte]

You have one minute.

[Mike Wallace, Conservative, Burlington, ON]

I'm going to ask a question of my friends from the dealers' association. I asked the question last night, because last night we heard from them.

I just bought a new car, by the way. I have a new Ford sitting in my driveway, a 2009.

[Richard Gauthier]

Thank you for that.

[Mike Wallace, Conservative, Burlington, ON]

I have a Toyota that needs a new engine, and I have to decide whether to put a new engine in a 1998 car. Are you saying the automotive companies are looking for us to pay for the scrappage program directly, as the Government of Canada? Or are they helping with that? Or is that something you haven't worked through yet?

[Richard Gauthier]

No, we're not here to speak on behalf of the manufacturers. What we are saying is that the current scrappage program, which was initiated on January 1 of this year, offers an incentive of $300. There are more than five million vehicles that are pre-1998 on the roads right now. There are one million 1987 vehicles on the road today. Each one of those 1987s pollutes at the equivalent rate of 37 new cars that are currently on the road, manufactured by all manufacturers in Canada.

The government, along with the auto industry, has entered into a memorandum of understanding in order to reduce greenhouse gases by 5.3 megatonnes by 2010. Everyone is working very hard, feverishly, to try to move towards those environmental objectives, which we strongly support as good corporate citizens. What we're saying is that a $300 scrappage program just is not going to do the trick. The scrap value of those vehicles alone exceeds that, so there's no motivation to move customers from that old technology into new technology. Every time you remove a 1987, it's like removing 37 cars from the road.

Germany has implemented a scrappage program; they're less than a year into the program right now. They have approached it both from the standpoint of an economic stimulus and an environmental initiative, and their sales are up 21% in February. They have actually moved 277,000 new owners into vehicles in the month of February alone. What we're saying is, as an economic stimulus, this is something the government should consider.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Thibeault, please.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

I'd like to thank all the witnesses for being here today.

I'd like to direct my questions to the Hon. Mr. Peters or Mr. Donner.

I was intrigued by your opening statement, when you talked about the New York Federal Reserve's paper, I believe it was. In early January 2009, the Bank of Canada released the results of two nationwide surveys that indicated businesses are finding it very difficult to obtain credit, because they're deterred by either the rising interest rates or the stringent lending terms. The same thing goes for credit for households; concern has been expressed about the reluctance of financial institutions to reduce the prime lending rates. We've been hearing that one of the ways we can get out of this recession is to spend, spend, spend, but if people aren't going to spend, and that's what this paper is talking to.... Maybe you can expand a little bit on that and talk about the paper.

[Arthur Donner, Economist, Canadian Centre for Policy Alternatives]

Thank you very much for the question.

There's a very simple concept in economics 101. I'm not sure if it's taught any more; it's called the fiscal multiplier. As the Canadian budget recognized and as the Congressional Budget Office reports recognize, the multipliers are, for the short term, much larger on the spending side than on the tax side.

Ironically, as you get inflation coming down and as interest rates come closer and closer to zero, the spending multipliers increase. In other words, fiscal policy becomes more powerful. We're discussing a paper that points out that tax cuts, when you're in a zero interest rate environment, can actually lower inflationary expectations, raise real interest rates, and actually can be counterproductive.

We think the evidence is overwhelming that in order to jolt the economy—we believe the economic situation is quite grave, and I think I speak for my colleague as well—that the effort should be concentrated on getting spending out as quickly as possible on the high multiplier areas, and the highest multiplier areas are in the infrastructure area.

I hope that answers your question.

[Glenn Thibeault, NDP, Sudbury, ON]

I'd like to give you the opportunity if there's anything else you'd like to expand on.

[Douglas Peters]

Yes. You were mentioning that it's very difficult to obtain credit in a recession. Consumers are reluctant to spend, and we've seen that. Bankers are reluctant to lend, as they should be. The risks are higher. You wouldn't want your bankers to go out recklessly spending. Ms. Dickson keeps a tight rein on them to make sure they don't do that, so you do have this considerable difficulty, and that's where the government must come in with a major fiscal stimulus, and the central bank as well must come in with its monetary stimulus, to bring it out of the recession, to get the consumer happy again. The banks see that there is less risk. We're actually going to come out of this recession sometime and we'll see the consumer able to repay and businesses able to repay their loans.

[Arthur Donner]

May I just jump back in on the credit question? We are experiencing, globally, a massive financial de-leveraging, and I acknowledge that the Canadian banks are in a far better position, as I know my colleagues understand, than their counterparts in other countries. At the same time, we shouldn't be satisfied only with the fact that credit creation through the Canadian banking system seems, if you look at the numbers, almost normal, because it's the non-banks that have collapsed in a major way, and it's the non-bank credit that goes through sales finance companies, life insurance companies, the commercial paper market, etc. It's the collapse of that market that is very serious and drying up credit.

If things were so good in our banking system, why haven't credit interest rate spreads narrowed further? That's my only question.

[Glenn Thibeault, NDP, Sudbury, ON]

I'd like to direct my question to Mr. Gauthier or Mr. Hatch.

Back in November I had a great lobby from many of the auto dealers in my riding of Sudbury, talking about the issues they were having. Of course, we were talking about how it was difficult for consumers to get the loan, and when they did get the loan they were walking away because the interest rates were higher. One of the dealers pointed out to me that he was also having difficulty.

If we're talking about interest rates, I believe you mentioned it, Mr. Hatch, where they have these large loans to pay for their buildings, to pay for their overhead, and now we're seeing these interest rates come in. Is this something that's common? Maybe you can just talk a little about that.

[Michael Hatch]

Yes, that's what I was talking about. That's the single biggest problem that our dealers are dealing with right now. A lot of these dealers--people around this table will know--have been where they are in every community in Canada for decades, and they have had very long relationships. They're waking up to hikes in their rates, and these are credit lines worth millions of dollars. It's the biggest problem, and we hear about it from dealers every single day.

[Glenn Thibeault, NDP, Sudbury, ON]

So not only is there no revenue coming in because of a lack of sales, but they're seeing their costs increase by the financial institutions. They are negotiating increasing their interest rates.

[Michael Hatch]

Yes. As I said, it's the biggest issue they're dealing with. The $12 billion credit facility should help to address that. It's a significant sum of money, so we understand the need to design it in such a way that it's effective. Obviously, we want it to meet its objectives, which are to increase the accessibility and decrease the cost of financing for our members. That said, this is a problem that has to be addressed with speed and urgency, and a lot of our dealers who we're hearing from every day needed this to happen yesterday, frankly. We need this program to get going as soon as possible, while at the same time designing it in such a way that it meets its objectives.

[Glenn Thibeault, NDP, Sudbury, ON]

Great. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. McKay, please.