Finance Committee on Oct. 27th, 2009

[The Chair, Conservative, James Rajotte]

Merci, Monsieur Laforest.

Mr. Menzies.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

Thank you to our two witnesses here today.

I am listening to your comments and thinking back to about a year ago. A lot of things have changed in a year. We had no idea where we were headed, but I would like to go to the role our finance minister certainly played. There was a reason he was named finance minister of the year. I think people don't realize the role you play. You go to these meetings too, Governor, and interact with your counterparts. I'd just like you to reflect on that, and we'll follow up with some of your comments yesterday that I think follow along that theme of Canada's role in trying to make sure we stay the course.

I'd like some comments from you on Canada's role in that. I sense it's larger, perhaps, than most Canadians recognize. We were a major part of the recovery because we were the ones who were pushing and continued to push on staying the course with this stimulus money--it was the right decision, and it's turning out to be proven that way.

You talk about our conditions having improved but only minimally, so if you could, just explain to us the role you play and your interaction with central bank governors from other countries--G-8 and G-20, for example.

[Mark Carney]

Thank you.

First, I'll say for the committee's benefit that there are frequent communications between the governors of the G-7, G-10, and G-20 central banks now, but very frequent direct meetings, monthly meetings, face-to-face, more frequent telephone conversations. Unfortunately, there were very frequent conversations around this time last year, because there was a lot to talk about, and through into the year.

I would assure you that because of that, a level of trust and openness has been built up with the core central banks over the years. It persisted in the crisis, and we benefited from that. We knew about every bad thing that was going to happen before it was public, directly from a governor of the affected central bank. That was enormously helpful for some contingency planning on our part, but also to have a sense of the dimension of the problems.

The second thing with the global central banks--and I won't go into all the details--is the coordinated liquidity provision: a series of facilities put in place, emergency facilities unfortunately, that had to be put in place to keep the system functioning. About this time last year, we participated in and helped initiate a coordinated interest rate cut of the major central banks because we could see the very rapid deterioration in the economy. It was helpful; it comes with a lag, but it was helpful on margin.

I think where you start to see Canada's broader role--and I very much broaden this to the role of the Minister of Finance and the Department of Finance and the regulators--was when you shifted into fiscal policy and then saving the system. In the meeting in October of the G-7, when it was unfortunately necessary for some fairly bold, unprecedented moves to be taken, Canada had credibility at that table to make that case: that now was the time for everybody to step in and support their institution so the system as a whole would continue to function. That was not an enjoyable decision for anybody to take, but it did help to have somebody at least at the table for whom it wasn't immediately necessary, and I think on margin that helped build that consensus. Major decisions were taken there.

The forward-looking issue since then has been how to rebuild the system. The crisis lingered for a long time after that, but it was arrested then. The tail was going to be taken out then, I think, once the decisions of October last year were taken. But how do you rebuild the system? That's the G-20 regulatory agenda that has been built up over time. I think Canada has played an important role, in part because there are some lessons to take from why our system did not have the problem, and we've taken lessons from that. What's been important as well is to be constructive around the table is to be honest and recognize that there are lessons for us to learn from what's happened elsewhere and there are things we can improve about our system and participate in those discussions that way.

[Ted Menzies, Conservative, Macleod, AB]

Okay, thank you.

That's very valuable, because I think most people don't understand all of the roles the Bank of Canada plays.

If I can get way off topic here, I do want to recognize Paul Jenkins for all of the advice he has helped me with on pensions. I don't think many people realize the involvement the Bank of Canada has had in pensions, the studies you have done. I appreciate, Paul, all of your advice on this process.

Very quickly, I read a quote from Christian Noyer, if I'm pronouncing it properly, the central bank governor of France. He's suggesting that there are signs of resumed risk-taking practices reminiscent of those that led to the crisis. To your comments, I hope we've learned from this about how difficult it has been to deal with this. I hope we've learned and don't go back into the risk-taking we had before. I'm sure that's the role you've been playing.

[Mark Carney]

Very briefly, I would associate myself with Governor Noyer's comments. There are concerns globally about the resumption of some of the practices previously.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Menzies.

We'll go to Mr. Mulcair, please.

[Thomas Mulcair, NDP, Outremont, QC]

Welcome, Mr. Carney and Mr. Jenkins.

In a time of crisis, clear answers help people understand issues that are actually quite complicated. The last time we had the pleasure of meeting, Mr. Carney, our topic was tax havens. You were telling us about what you called “aggressive tax planning”.

I wonder if you could give us more details about that because, since we last met, the OECD has published quite an alarming figure. It seems that $6 trillion are now in tax havens. In French, I would say “billion”, which means the same as “trillion” in English: 1,000 billion. That makes it a little difficult to follow, but we are talking about 6,000 billion dollars.

An expert committee that studied the matter in England made a comment that is interesting in a societal context. The experts said that money is often earned through stable institutions like central banks, courts, police services and government institutions. But once it is earned, the money is taken out of the economy when people send it offshore.

Let me come back to your expression, which I suppose would be “planification fiscale aggressive” in French. It has always been the case that tax evasion is not allowed. On the other hand, we are not required to arrange our affairs in order to pay the most possible. I would like to ask you where you see the dividing line to be.

Tax avoidance is legal. No one is requiring you to organize your affairs in such a way as to pay the maximum tax possible. But tax evasion is illegal.

I'd like to know if the bank has taken a look at that rather alarming figure of $6 trillion that the OECD put up with regard to tax havens. Is that part of your thinking with regard to the overall money supply?

[Mark Carney]

Thank you. That is a very important question. The matter of tax havens is one of the G20's highest priorities. I should point out that the G20 presently has a priority process chaired by the senior associate deputy minister, Mr. Macklem, and the head of this committee. So, working with France, a process was put in place last month that is due to wrap up in January, I believe. Its goal is to...

investigate the consistency of implementation of the new principles that were agreed on in Pittsburgh for tax havens and to identify those that are inconsistent, that would allow crossing that line that you rightly made between avoidance and evasion, and do not provide sufficient information for appropriate remedial action.

That is a priority that's being addressed, and Canada is involved through the Department of Finance. It goes back to Mr. McCallum's question earlier in terms of division of labour. There are resources in the department that are on that. We're aware of the issue, but that's their responsibility and they're active on it.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you for that clear answer.

Since these rounds go so quickly, I'm going to start on another issue I would like to discuss with you. It might seem a bit far from the immediate subject of the economy, but I think you might be convinced that it has something to do with the value of the Canadian dollar. There's a basic principle of sustainable development that's called “the internalization of costs”. When you want people to understand it, you tell them that the extra $3 they pay on a tire is fair if the cost of recycling that tire is about $3 and that the people who drive cars should pay that $3 rather than have it come out of general tax revenues. That's a basic principle of sustainable development.

With regard to the tar sands--or to please our friends from Alberta, the oil sands--there's an argument that could be made that we're not internalizing the entire cost in what is being sold, both environmentally and to future generations. That influx of dollars that has not been pared down by the internalization of cost is one of the drivers for the increased value of our loonie, which of course is having the side effect of making our exports even more difficult, and hurting the manufacturing and forestry sectors even further.

Is it part of your job, under the division of labour you described to us earlier, to look at these issues? I think it is. Even though the subject of the oil sands might seem a bit far from your normal day-to-day preoccupations, I honestly believe that if we're going to take a sustainable development approach--in other words, every time the government has a decision to make, to look at the environmental, social, and of course economic aspects to determine what course of action is best to take....

Right now we're spending $60 billion extra this year on the backs of future generations, but we're not leaving them anything in terms of a sustainable green renewable energy future, as we could have done with that money, and as the Americans are doing. We're leaving them an inheritance, a succession that will require them to spend even more to clean it up.

I would like you to talk bit about that notion of sustainable development, internalization of costs, and the oil sands as one of the drivers of the higher Canadian dollar, and whether under your division of labour it's part of your reflection.

[Mark Carney]

I'm tempted to say no, it's not under the division of labour. But no, the energy sector is clearly a very important sector in the Canadian economy. We need to understand the short-, medium-, and long-term drivers for investment in those sectors. In fact in the report this last week we highlighted recent developments and structural developments in natural gas markets, which are important for the outlook investment in natural gas in Canada. That's something we've taken into account, which is a potential structural break in investment in natural gas because of developments in U.S. shale gas, an important point for Canada. So we do look at the various sectors and those forces.

I would note that cross-border investment decisions in energy are partially influenced by expectations for the pricing of carbon over time in various jurisdictions. The timeframe for that and the scale of that are also influenced by the prospects for agreements through the various UNCC processes, including what is leading to Copenhagen, and related to that. They are separate tracks, discussions that happened through the G-20.

Now, as a central bank, we obviously take those decisions as they are made and look at the implications for investment and activity in Canada.

[The Chair, Conservative, James Rajotte]

We'll have to continue this discussion on the second round.

Thank you.

We'll go now to Mr. McKay, please.

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

Thank you, Mr. Chair.

Thank you, Mr. Carney and Mr. Jenkins, for your appearance.

I always appreciate your candour. I see in this morning's paper that you are weighing in against hubris among central bankers. All I can say is good luck with that. Possibly next week it will be original sin.

In the category of tilting at windmills, as exemplified in your recent conversation about the Canadian dollar, I commend you in every effort you make to talk the dollar down. But it seems that we have a permanent case of Dutch disease and that our commodities drive our dollar. We have not chosen the Norwegian solution, which is to isolate commodities from their economic impact. By default, or otherwise, we've chosen the Dutch model. We have permanently impoverished some regions of the country that don't have commodities while helping to enrich those that do.

Our non-policy decisions will ultimately make us permanent hewers of wood and drawers of water, with little prospect, in spite of the best efforts of the Bank of Canada, of seeing the Canadian dollar come back to a level that would allow a real manufacturing sector to succeed in this country.

[Mark Carney]

Just for the record, I spoke of the hubris of bankers, not central bankers. There is no hubris in central bankers, or any original sin.

As to your question, it's an important issue. There are many factors that drive markets in our currency and all others. The Canadian economy, as you correctly imply, is much more than primary industries. The other areas of the Canadian economy—the manufacturing sector, the service sector, other primary industries aside from energy—are important components of our economy and influence pressures on inflation, which is ultimately our mandate. The point we have tried to make is that our suite of policy tools will be used to ensure the maximum likelihood of achieving our inflation target over a reasonable horizon. The question of the dollar needs to be seen in that context.

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

In effect, and I put this a little stronger than I might care to, you're saying that your inflation policy is the only policy instrument you have to deal with the unwarranted rise in the Canadian dollar. Am I misinterpreting what you're saying?

[Mark Carney]

The clear mandate of the bank in the conduct of monetary policy is to achieve the 2% CPI inflation target. That is the clear mandate, that's how we're judged, and that's how we're held accountable. Related to that, but not always overlapping it, we have an intervention policy agreed to by the Government of Canada. It provides for intervention in the foreign exchange markets under two scenarios: gapping in the foreign exchange market, which is a relatively rare occurrence, given the liquidity of those markets; and market volatility sufficient to create the prospect of serious impact on economic growth. These are conditions not to be taken lightly.

[Paul Jenkins]

In response to your question, Mr. McKay, it's worthwhile to go back to the governor's opening statement about how we currently see things. We have a flexible exchange rate regime that is part of our inflation control framework, and we look at the exchange rate through that prism. What we have said in our press release and in our monetary policy report is that notwithstanding the positive factors currently in play in the Canadian economy, the rise in the Canadian dollar, if it were to persist, could have counterbalancing effects. So we're looking closely at the impact of the dollar on the Canadian economy and the inflationary consequences of that impact. It's through this prism that we think about these things.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McKay.

We'll go to Mr. Roy for five minutes, please.

[Jean-Yves Roy, Bloc, Haute-Gaspésie—La Mitis—Matane—Matapédia, QC]

Thank you, Mr. Chair.

Good morning, Mr. Carney and Mr. Jenkins.

Earlier, when you were answering my colleague Mr. Laforest's question, you said that financial institutions need to show good financial citizenship because they have broader responsibilities. That was the gist of your comment. Most observers today are saying that as soon as the economy started to rebound, American financial institutions, in particular, went back to behaving the same way they had before.

Is it too much to hope that financial institutions might show good corporate citizenship with respect to their activities? The current economic crisis was caused by the fact that financial institutions, particularly American ones, took enormous risks without the reserves they needed to deal with those risks.

The same can be said for big companies. GM and Chrysler are just two examples of many large companies that were not able to handle the crisis because they did not have enough in the way of reserves and were not reasonable in their planning. Ford, on the other hand, had the reserves it needed and was able to deal with the crisis.

Right now, observers are telling us that the system has not changed, not one bit. In Europe, they are considering imposing a capital tax on financial institutions. The same could apply to companies, in order to create some sort of insurance so that governments are not obligated to invest hundreds of billions of dollars—as was the case in the US—because of a crisis brought on by the irresponsible behaviour of the heads of corporations and financial institutions. I think we should establish some sort of insurance.

Mr. Carney, I would like to know if you are currently talking to the Department of Finance about the possibility of imposing a sort of capital tax that would ensure that we have a fund to deal with the irresponsible behaviour of some in the financial sector?

[Mark Carney]

I will start with the last part of your question.

No, we are not in talks with the Department of Finance regarding a new tax on transactions or capital. In Canada, about five years ago in certain provinces, and some ten years ago at the federal level, there was such a capital tax. In my view, a capital tax is a very bad idea. But the idea of regulating capital is very important.

The Bank of Canada, the Office of the Superintendent of Financial Institutions, our regulator, and the Department of Finance work together very closely at the international level to enhance rules about capital for all financial institutions, but as for European and American institutions—

[Jean-Yves Roy, Bloc, Haute-Gaspésie—La Mitis—Matane—Matapédia, QC]

But not for large companies.

[Mark Carney]

We are not doing it for large companies.

[Jean-Yves Roy, Bloc, Haute-Gaspésie—La Mitis—Matane—Matapédia, QC]

But the problem is similar to that of the banks.

[Mark Carney]

At one point, the large auto companies had a lot of capital, but they suffered losses year after year.

No one is talking about regulating the capital of enterprises; we're talking about financial institutions, because of their central role and the spillovers,

the ripple effects on other sectors of the economy.

That's where one needs to buttress things.

We are working to bring global capital standards toward Canadian levels. We are very confident that will happen, but there's more work to be done in those discussions.

[The Chair, Conservative, James Rajotte]

Thank you.

Just briefly, Mr. Jenkins?

[Paul Jenkins]

No, it's okay.