Finance Committee on April 28th, 2009

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Laforest.

Mr. Bernier, go ahead, please.

[Maxime Bernier, Conservative, Beauce, QC]

Good afternoon, Mr. Carney and Mr. Jenkins, and thank you for being here with us today.

In the annex to your “Monetary Policy Report”, which you tabled last week, you explain how the Bank of Canada will proceed with what the experts call quantitative easing or, in other words, how it will increase the amount of credit in the economy. You traditionally do that by buying treasury bills.

In the context of this exceptional measure, you could also do so by buying financial assets from the private sector, that is to say the shares or bonds of individual private businesses. The bank will buy those assets by creating money out of nothing.

I must first tell you to what extent this practice of creating money out of nothing and artificially inflating credit troubles me. The inflationary theories of Keynes have been discredited for a number of decades. However, you'd think everyone has suddenly become a Keynesian. If creating new money and inflating credit could really stimulate growth, there would never be recessions or economic slowdowns.

In fact, a number of economists believe that excessive money creation caused this crisis. Excessively easy credit during most of this decade purportedly caused bubbles, particularly in the finance and real estate sectors. A recession occurs when those bubbles burst and the economy has to readjust. If it was easy credit that caused the bubbles and the crisis, I would like to understand how we can hope to get out of the crisis by further increasing credit. By doing that, don't we risk further distorting the economy?

Some say that quantitative easing is now the path to take, since it is practised at most other central banks of the major countries. However, if Canada experiences a less severe crisis because its monetary policy is more conservative and more prudent than those of its partners, it seems to me that doing the same thing as the others is not necessarily the best option.

Mr. Carney, in your report, you admit that purchasing private assets will increase their prices and that that will be done in a neutral manner with respect to sectors and assets of a similar nature. How can you remain neutral, when there are thousands of different financial assets in various sectors? Isn't the bank running the risk of putting itself in a position where it will favour certain sectors or businesses over others?

[Mark Carney]

Thank you for your question. First, I would like to emphasize a few points. The objective of these transactions would be... I'm using the conditional for a reason. This isn't the Bank of Canada's plan, but it is one card up our sleeve, only in the event it becomes necessary to promote greater monetary easing as a result of a negative shock. We would have options, such as easing credit rules. The purpose of these transactions is to improve financial conditions, credit conditions across Canada as a whole.

As regards neutrality with respect to similar sectors, we can use adjudication, for example. That is one way to be neutral with respect to certain sectors. It's one tool used by the Bank of England to ease credit.

With respect to your reference to Mr. Keynes, I would simply like to emphasize that it is no longer a question of Mr. Friedman versus Mr. Keynes, this idea of the relationship between the money supply and inflation. In that context, even though our situation and our financial conditions in Canada are better than elsewhere—and that's the truth—they are nevertheless difficult and are remaining difficult. The [Inaudible - Editor] of money fell, so that relationship, that danger is much less, as a result of the recession and the global financial crisis.

[Maxime Bernier, Conservative, Beauce, QC]

Thank you.

[Paul Jenkins]

There are other techniques that can be used to achieve a neutral impact. For example, we could think of the indices. There are techniques that a central bank can use to achieve a neutral impact.

[Mark Carney]

The Bank of Canada has no interest in pursuing an industrial policy.

[The Chair, Conservative, James Rajotte]

Mr. Bernier, you have one minute.

[Maxime Bernier, Conservative, Beauce, QC]

I'm very pleased to learn that you're talking about quantitative easing in the conditional only and that you won't automatically resort to it. If Canada's economic position requires it, you'll have another option in your tool box. I believe that's very healthy.

With regard to the neutrality issue, if I understand correctly, it's perhaps not so much the direct purchase of securities in the stock or bond markets, but rather the indices in the various sectors that could help achieve a neutral impact.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Bernier.

Mr. Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Welcome, Mr. Carney and Mr. Jenkins. It's always a pleasure to see you.

Mr. Carney, you gave a good answer earlier to the question from my colleague Mr. Laforest concerning the difference between your quite optimistic forecasts and those more tempered ones. You indeed drew the necessary distinctions.

I share the opinion of my colleague Mr. McCallum, who congratulated you saying that you are doing a good thing by giving some assurances to people who are perhaps planning to buy a house. That's one way of stabilizing the situation and generating confidence. I think that's somewhat the purpose, even though you refrain from saying that you might at times be cheerleading. You said that you were only giving the figures. I think there's nevertheless a matter of trust that people have to have in the economy. When you provide that guarantee of more than one year on the interest rate, there's something reassuring that ultimately can only help.

The conclusion is that it is much safer to make predictions about things we control than those we do not, which is very good. We have greater chances of not missing our shot.

I want to go back to the topic of inflation, which has come up in the discussions.

You will no doubt remember—because you have a good memory for these things and for many others as well—that I spoke to you about that a few months ago. You reassured me by saying that you had all the necessary tools.

Earlier you said that we were talking about $4.1 trillion at the world level. I always take the trouble to say that “billion” in French corresponds to “trillion” in English, because that may be confusing. The French billion is 1,000 English billion. So we're talking about $4 trillion worth of debts, bad bank debts.

Mr. Obama has already printed billions of dollars, as though he were a creditist. He's channeling Camil Samson. We are happily printing money, and you are nevertheless sure that that money will have an impact on the market and that we won't have the same kind of inflation as we experienced in the wake of the Vietnam War.

Let's remember that the price of the Vietnam War, apart from the price in equipment and human lives, was terrible inflation because the cost of the war had to be paid. We've already spent billions of dollars in Iraq and Afghanistan that will have to be repaid sooner or later by printing money.

Reassure me by telling me that we won't be repaying the billions of dollars in question through Zimbabwean-style inflation.

[Mark Carney]

Thank you.

First, you're right. It is absolutely preferable right now to have a certain degree of stability. With our conditional commitment, I believe we have provided that in part. However, it is a conditional commitment, and conditions are inflationary prospects for Canada. That's clear.

Second, with regard to inflationary tendencies in the United States and the world, I would like to emphasize that there are currently disinflationary pressures at work in the world. The major difference between today and the United States in the 1960s—the period of the Vietnam War and so on—is that global growth is very weak. It will probably be negative in 2009 and, in 2010, according to the Bank of Canada, it will be 2.2% internationally. The potential global growth rate is probably about 3.5%. So there is a gap that will continue to increase next year. Disinflationary pressures could persist for some time.

[Thomas Mulcair, NDP, Outremont, QC]

Let's assume that those disinflationary pressures last one or two years. Once they are over and things start to stabilize, we nevertheless can't simply print money; we have to repay the debt.

[Mark Carney]

Yes.

[Thomas Mulcair, NDP, Outremont, QC]

How will we do it, if not through inflation?

A lot of people who have invested in today's markets would like nothing better than a good spike in inflation to change the value of their securities and currencies.

[Mark Carney]

You're right once again. It's absolutely necessary to have an exit strategy. It's necessary for the federal reserve and it's one of the principles of the Bank of Canada. If it were necessary to use our framework, it would absolutely be necessary to have an exit strategy.

One would need to design the purchase of any securities, whether they were government or other securities, in a way that had a maturity ladder that had a way to reverse those operations quickly. After all, the goal is to get back to the inflation target, not through the inflation target. And we would be very prudent in the application of what we're responsible for, which is this framework.

[The Chair, Conservative, James Rajotte]

You have one minute, Mr. Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

I'm going to take this on to another track, because I'm not sure that we're going to get a second round on this team. I'm going to take you onto a slightly different track now that has to do with following money to tax shelters.

I'm talking about tax havens.

I mean tax havens.

There are constants in regulatory theory. One is regulatory lag: we're always a little bit behind the people we're trying to regulate. Another one is regulatory capture: we often have people from the same domain, so they tend to look at things the same way. If people are used to having tax havens and they've always been part of their lives, and then they come in to regulate in the public sector, they'll tell you that this is the way things are.

Is that something we should be looking at as part of the solution as we come out of this? We're going to be looking at restructuring things such as pensions. We had good hearings on that today. We have a lot of work to do as parliamentarians to try to put in the structures to make sure that things are more solid next time around as we get away from the Milton Friedmans of this world who have told us that we should stop worrying our little heads about this; we didn't understand it anyway. It looks like nobody understood it, or at least some parts of it.

[The Chair, Conservative, James Rajotte]

Okay, Mr. Mulcair, what is your question?

[Thomas Mulcair, NDP, Outremont, QC]

What can we be looking at in terms of tax havens, specifically?

[Mark Carney]

Very briefly, the issue of paradis fiscaux, or tax havens, was an issue addressed by G-20 leaders in London. It is on the agenda. It was not a core part of the problem, but as you suggest, it doesn't mean that it shouldn't be looked at, because it could be part of the next problem.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Mulcair.

We'll go to Mr. McKay for five minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

Thank you, Governor. Thank you Deputy Governor. After Mr. McCallum and Mr. Mulcair's interventions, I feel relieved of the obligation to say something nice about you.

I want to pursue the noises about your taking on a macro-prudential role in the banking system--that you will be shifting from central banker to super-banker--and the potential for conflict between your primary role, which is a monetary role, and this other role by which you would effectively leave the prudential part to OSFI but in all other respects would be supervising the financial system, particularly the federally regulated institutions.

The analogy that springs to mind, which is not original to me, is putting the ministry of the environment and a ministry of energy in the same department. The issues are not always the same and the policy responses are not always the same. In your enthusiasm, for instance, for quantitative easing, which seems to be putting money into the system to buy assets of varying degrees of toxicity, you actually increase the money supply and therefore the potential to increase inflation, when maybe the proper monetary or policy response would be to keep inflation within a band or under control. I appreciate that when you were talking to Mr. Mulcair you had something of a response to that, but you didn't respond to that issue as it relates to your apparent aspiration to take on a macro-prudential role in the financial system.

[Mark Carney]

Okay. I take it there's a question mark after that.

The first thing is that I would note that G-20 leaders agreed in London on the importance of a macro-prudential approach to regulation. So that is a declared objective of all the major economic powers of the world.

The question is how to put that into place. As you rightly note, there are different perspectives from different agencies, and I would say further that there would be different ways to put this into place in different countries. It matters what your regulatory history is; it matters what the structure of your financial system is. And in Canada I believe we have extremely effective cooperation among the federal regulatory agencies—I am including in that the Department of Finance in discharging its responsibilities, obviously OSFI, CDIC, and FCAC—and that lends itself to certain solutions that could operate.

The issue is probably, first and foremost, to determine the precise tools, the mechanisms by which one would put this into place.

I would say—and I'm not commenting on your depiction of any aspirations—that what the bank can bring to the table in these discussions is a macro perspective. And when you look at what macro-prudential regulation or macro-prudential surveillance is, the issue is how either regulations or behaviours start and when they get to a point where they feed back on the macro-economic outlook and the economic cycle and exacerbate those cycles.

We are certainly seeing a very negative feedback from ignoring those issues in our partner countries around the world, and we don't want to put ourselves in that situation going forward.

[John McKay, Liberal, Scarborough—Guildwood, ON]

But the interesting point is that the G-20 countries all get together and say we need macro-prudential supervision. For pretty well everyone in the room, that's true. With Canada it's not quite so true.

So it seems that the impetus to go in this direction is based upon the monetary/fiscal banking experience of other countries rather than here. So if it ain't broke, why are we fixing it?

[Mark Carney]

It is very difficult to predict the next crisis, and I would encourage this committee to study carefully the lessons of the crises that were born outside our borders to see their potential applicability to the Canadian system. One should never assume that because it hasn't happened, it won't happen.