Finance Committee on Oct. 27th, 2009

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

We'll go to Mr. Kramp, please.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Chair.

Welcome to all of you.

I was pleased to see that the Bank of Canada, in your earlier comments, doesn't speculate but deals with facts. But I'm going to ask you to maybe do just that, only in a little different situation and with regard to the U.S. situation rather than Canada. The reason I would ask that, of course, is that the relationship is well cemented; there are the references to one sneezing and the other catching the cold, and the mouse and the elephant. But in the assessment of the current financial health of the U.S. institutions, certainly that has serious and severe implications for the general direction of the Bank of Canada and/or Canada as a whole. Would you be in a position to just speculate on the current assessment of the U.S. financial services sector, and also the future prospects of the U.S., both in long-term and short-term growth?

[Mark Carney]

In terms of the U.S. financial institutions, as I think you may be aware, the Federal Reserve, in conjunction with the regulators, conducted a thorough stress test of the 19 largest institutions in the United States earlier this year, and that revealed capital requirements consistent with a further severe recession between now and the end of 2010. Those institutions have all now been recapitalized, and in many cases more than recapitalized, so that they have more capital than was required under SCAP, the supervisory capital assessment program. These institutions represent more than 80% of the banking assets in the United States. So to Mr. Pacetti's question earlier, we will see a series of smaller institutions with difficulties, but this is the core of the U.S. system.

That said, it is the view of G-7 governors and regulators that there is an opportunity now for global institutions outside Canada, where profitability is returned to the sector, to further build capital buffers in order to provide the necessary credit for the economy, and there is a view that institutions should take that into account when considering returns to shareholders and setting compensation, given the global outlook. That applies equally to the United States, as it does elsewhere.

In terms of the short- and longer-term prospects for the United States, history has shown—and generally we make reference to this in the report—that countries that have been affected by financial crises often see a reduction in their potential growth and it takes a long time to bring themselves back. So the absolute level of the economy, the capacity of the economy, is reduced, and then in terms of the speed with which they can return, it takes some time to get back. There are certainly elements of that in the United States, and that is one of many reasons we see what is for the United States a substandard recovery. We detail that in a chart, actually, on page 10 of the report, which shows all the historic recoveries since the Great Depression in the United States, and this will be weaker.

Longer-term potential of the United States is still in the hands of the inventiveness and resources of the American people. It's down to decisions of government, the central bank to a lesser extent, because these are longer-term decisions, and of individuals there, but it's something we're all going to have to watch.

The final point I would make is that it is our view that this crisis is a watershed in many respects, in that there will be an adjustment of demand in the United States, less consumption, and more outwardly focused net exports, and more of global growth will come from major emerging markets than our historic markets. So from a medium-term perspective, Canadian businesses are well advised to seek out those markets and develop those ties.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I have a brief question.

[The Chair, Conservative, James Rajotte]

You have ten seconds.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Regarding the Chinese renminbi potentially replacing the dollar at some particular point, that's recognized, but what are your thoughts on that?

[Mark Carney]

The U.S. dollar is the reserve currency of choice. That is not a right, it is a reality. Of choice, the United States dollar is the reserve currency, and we expect that to continue to be the case for the foreseeable future.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Kramp.

We'll go again to Mr. Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Carney, in your remarks with regard to the United States situation, you walked us through some of the lessons of the past year, some of the things we've learned and some of the things that are being corrected, one would hope, toward the future.

You referred to the insistence of the governor of the French bank that we have to get away from some of the risk-taking practices of the past, which he sees as creeping back in. It can fairly be said that President Sarkozy of France, both on the issue of tax havens and on the issue of these past practices, is taking a leading role. He was very happy after his first G-20 meeting with President Obama, because the issue of tax havens, which you talked about correctly before, was dealt with.

One of the things that we find here in government, if this whole exercise is to have a purpose.... You correctly refer also to the difference between what you have to do as the governor of our central bank and what the minister and his department have to do and what we all have to do as parliamentarians, who are supposed to give form to all these nice thoughts in legislation. What other things should we also be looking at?

Mr. Menzies referred to the work Mr. Jenkins is doing on pensions. I think there is something that cuts across party lines that we can be doing better to protect pensions, and that long term has a lot to do with the stability of our economy and the quality of life of our society. But what are some of the other things that we can and should be looking at?

For example, is it possible to look at the simple objective fact that many executive pay packages are now 250 to 300 times the wage per year of the average salaried employee? Should there be a fiduciary responsibility placed on members of the governing boards of corporate entities to make sure that when they are determining remuneration, global pay packages, it should be based on value added to the company, not pure speculation on the future? Is there something that we can be doing, as legislators, to bring that sort of legislation forward and better protect future generations with regard to the institutions that have shown to be, in many cases, quite fragile?

[Mark Carney]

That's an important question.

Do I take it you don't want a comment on pensions?

[Thomas Mulcair, NDP, Outremont, QC]

I think we all agree that on pensions we're on the right track, and we're getting an important report in December.

[Mark Carney]

Right.

With respect to compensation, there have been very carefully developed, thoroughly developed—with the endorsement of President Sarcozy directly—compensation principles that have been agreed on at the G-20, were agreed to in Pittsburg. They are consistent with many of the points you made and go beyond compensation tied to longer-term performance, compensation that vests over time, so you can find out whether that longer-term performance actually happens; an ability to claw back compensation if it proves to be ephemeral; corporate governance reforms that allow shareholders, through the boards, to have a say on pay; and disclosure principles that would allow people to make informed decisions about those. And those principles have been agreed to. The spirit of those is to be put into effect very quickly, over the next several months. The regulators are going to monitor the extent to which actual practices are consistent with those principles. And this is going to be a test of how well the process works, because then, at the G-20 level, through something called the Financial Stability Board--which brings together regulators, central banks and treasuries--there is going to be a review of the various packages in the various jurisdictions and whether they are consistent. So there will be a peer review process that will be able to challenge other countries, if their practices are not consistent with these principles, which is relevant in a--

[Thomas Mulcair, NDP, Outremont, QC]

It is easy to see how someone might perceive that as the fox guarding the chicken coop, if we are not pursuing legislation that would set out the authority to rigorously enforce those principles, with a view to public scrutiny. Is it sufficient, or will we need to adopt more stringent measures, do you think?

[Mark Carney]

In my view, it is better to have principles and procedures to assure lawmakers that those principles are being implemented in Canada and internationally. The procedure set out by the G20 includes regulators and the Financial Stability Board. After the first run-through of the....

The first time of this process, which will be within....

the time to ask questions will be in five or six months.

[Thomas Mulcair, NDP, Outremont, QC]

All the parties have agreed to wait until December to discuss the pension issue. In six months' time, we will have a first version of what you have just described, and we will be in a better position to determine whether we need to intervene or not.

[Mark Carney]

It will be February or March, I believe.

[The Chair, Conservative, James Rajotte]

Merci.

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

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

Thank you, Chair.

Thank you again, Mr. Carney.

I want to go back to this issue of this recovery that doesn't feel like a recovery. Some have described it as a jobless recovery. I look at chart 14 in your report, which shows that there's excess supply that remains in the Canadian economy. It's consistent with my own family's experience, where I have a nephew who's a recent graduate of an engineering school, had a job, and got laid off. Another one was a graduate of a business school, had a job, and got laid off. Both of them are struggling to find work. It's consistent with my own constituency's difficulties with people having work.

Then we read in this morning's paper that the stats on EI are actually kind of stale-dated information. You look at the U.S., and their unemployment rates are twice normal rates, around 9% or 10%. Ours are up there as well.

So I'm wondering whether we're actually looking at, if you will, structural unemployment going forward within the near term to medium term, that both from your own information and from observations abroad, it would appear the new normal will be unemployment rates of 8% to 10% in Canada, which will be largely parallelled by the U.S. I would be interested in your observations on that.

[Paul Jenkins]

Perhaps I can lead off in response to the question.

I think one of the very impressive attributes of the Canadian economy that we've seen over the last five to ten years has been the flexibility in the Canadian economy, including in the labour market, where we've actually been able to respond to shocks. That's not to say it's been easy, but we have been able to do it.

Perhaps a little bit to Monsieur Mulcair's question, I think that as a nation we need to continue to pursue policies that actually continue to help us increase what I would call the economic efficiency of Canada, our ability to adapt. Most of the shocks that we've had to deal with over the last 15 or 20 years have come from outside Canada. I have been very impressed with the flexibility of the Canadian labour market, so I would not subscribe to the view that you've just put forward in terms of structural adjustment, structural unemployment.

What we will have, without doubt, going forward will be a need to continue to focus on some restructuring of the Canadian economy in response to what we have gone through. I'm absolutely confident we will make that adjustment, but it will take continued persistent effort to bring that restructuring about.

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

I'm very impressed by the ability of Canadians to adjust to changing labour conditions. I don't disagree with you on that point. I'm somewhat less impressed by government's response to changing conditions, and the apparent unwillingness to actually engage in the new economies, to encourage the new economies, and things of that nature.

So it appears to me that in some respects Canadians are on their own, that they are going to have to adjust, that they are going to have to look at reduced work hours for quite a while. They're going to be looking at other forms of employment, where you pick up a little bit of a job here, and a little bit of a job there, and put it all together to pay your bills.

Can you give a suggestion as to a policy response that you think would be most efficacious, given this potential of protracted unemployment?

[Paul Jenkins]

The governor has talked about initiatives on the financial side. On the real side of the economy, an area that we need to continue to put focus on is the removal of interprovincial trade barriers. I really do think that is an issue that--although we've made some progress on it--continues to be important, and it very much is in the context of having an economic union that can operate effectively in response to changes in the world that are going to continue to affect us. That would certainly be one very important aspect.

The other element the governor touched on is that when you look forward, this changing composition of demand globally is going to be critical. We've talked about the fact that U.S. savings rates have to go up. That means the U.S. consumer is going to be buying less through that adjustment period, and there will be more reliance on growth in Asia. So these are going to be the markets that are going to be growing very rapidly. We have comparative advantage in a number of industries that we can sell into these markets, I believe.

[The Chair, Conservative, James Rajotte]

Mr. Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chair.

Mr. Carney, I want to come back to the speech you gave yesterday. You said that in order to prevent another financial crisis, the Bank of Canada wants to rely more heavily on principles-based regulation and the judgment of people.

From a practical perspective, we have just come through a financial crisis that may not be completely over. The Caisse de dépôt et placement du Québec suffered $40 billion in losses, and a large chunk of that was the result of investing heavily in commercial paper. The answers we have been hearing have a lot to do with the fact that we were relying on the judgment of certain people, and I get the feeling that their judgment was not very good.

It really makes me wonder when you say that you want to prevent another financial crisis by relying more heavily on people's judgment.

[Mark Carney]

I understand your concern, but I never said that.