Finance Committee on Dec. 5th, 2007

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I have one last question. As part of your mandate, do you believe you have a duty to consider the possibility that Canada may fall prey to something like Dutch disease? You know what Dutch disease is: it's when an industry boosted by the energy sector has negative impacts. In terms of your mandate, do you believe that this will be an important or crucial issue in the coming years in Canada?

[Mark Carney]

There are several points to be made here. First of all, the Bank of Canada always has to consider such issues or eventualities. There is one fundamental point in that regard, however, and it is that our economy is highly diversified. You cannot just say that we have an energy sector, a forestry sector and that's all there is. Our economy is highly diversified, and the services industry is very significant. It has had great success in recent years. There are also a lot of jobs in that industry that pay higher than average salaries. So, I see this as one aspect of monetary policy, but at the same time, our economy is highly diversified, and that is an even more important fact.

[The Chair, Conservative, Rob Merrifield]

Thank you very much. Now we'll move for seven minutes to Mr. Menzies and Mr. Dykstra.

I believe you're sharing your time, Mr. Menzies. The floor is yours.

[Ted Menzies, Conservative, Macleod, AB]

Yes, I will.

Thank you, Mr. Chair, and thank you, Mr. Carney, for appearing at our committee.

I'm very encouraged to hear your comment that this committee can indeed play a role, whether it be an advisory role or simply a questioning role. That's good to hear.

First, congratulations on your appointment. We do wish you well in your decision-making in the future in setting monetary policy in Canada, and please convey the thanks of this committee to the gentleman you will be replacing, David Dodge. It's a challenging job, and we thank him for his leadership in that role.

[An hon. member]

Hear, hear!

[Ted Menzies, Conservative, Macleod, AB]

We're all very well aware--in fact, this committee has spent quite a bit of time recently talking to different organizations from across the country--of the impact of the Canadian dollar vis-à-vis the U.S. dollar. Many countries are experiencing some turbulence in their monetary markets. We saw the credit crunch in the U.S. due to those subprime mortgages.

I was interested in your view, in your present position--and I respect that you're speaking today as an advisor to the governor--of what the Bank of Canada's role will be in the future, if you can explain it to us, in dealing with this issue. We realize the Montreal proposal is helpful, but where do we go from there? You comment about a wider range of securities in dealing with things like this, so could you share that with us, please?

[Mark Carney]

Thank you for the question. I do want to leave this as one of the messages in my remarks, but these issues are very topical and very important, and I think they will extend well into the first year, certainly, and potentially beyond the work program of my tenure at the Bank of Canada. So it's not only a current topical issue; these are deeper issues.

I'll reiterate that there is a very fundamental role for the bank in financial stability. Financial stability and monetary policy are very tightly linked.

The first thing we do is to make sure we provide liquidity. We set an overnight target rate. It was changed yesterday, as you all know, and we want the actual rate in overnight money markets to be the overnight target rate. So we provide--it seems sensible--liquidity into the overnight market occasionally, as required, in order to ensure that on average the overnight rate is the target rate. We have done that recently, and we have done it frequently, I guess, since August. It's common to other central banks around the world during this time of some stress in the money markets.

The issue is, what happens between the overnight rate and the rates about three months out? What you have in Canada is a fairly steep, unusually steep, yield curve going from overnight to three months out, and three-month rates are important rates for financial institutions.

The curves in the U.S., in Europe, and in the U.K. are much steeper than they are in Canada. So if we have an issue, it's a bigger issue elsewhere. And the question is--and this is what I was referring to in terms of instruments--what can the bank do or what should the bank potentially do to ensure that there is necessary liquidity further out so that changes in the overnight rate are transmitted out along the curve?

I will make one side point, if I may--it is simply an observation--which is that the change in the overnight rate yesterday has resulted in a lowering of that curve. So while the curve is still steep, at least it is moving with the overnight rate.

That's some of the aspect of what we're looking at in terms of providing some term liquidity. It is a very topical issue. It's being discussed, and you will see it consistently south of the border and in Europe, where they quite frankly have more flexibility in that overnight to three-month area than we currently do at the bank.

The other things we need to do, very quickly.... I think we need to consistently monitor the situation, both from a macroeconomic perspective and to bring it on down to individual institutions, and that's where we work with OSFI, the Department of Finance, and CDIC to make sure everybody has a best sense of the situation. I should reiterate for the committee that the bank is the lender of last resort, if necessary, to federally regulated institutions, solvent but illiquid federally regulated institutions, and we are actively working internationally through the Financial Stability Forum to provide our input to broader reforms.

A last point, though, and I don't want to leave any doubt, is that there is a fundamental principle here that what we're trying to do is make sure that current issues in the financial system do not propagate into the broader economy and impact the broader economy. But there is a principle that market participants should bear the consequences of their actions, so we need to strike the right balance between those two very important principles.

[Ted Menzies, Conservative, Macleod, AB]

Are we just about out of time?

[The Chair, Conservative, Rob Merrifield]

You have time for one more quick question, if you'd like.

[Ted Menzies, Conservative, Macleod, AB]

I know Minister Flaherty just recently was in a meeting with the IMF. Can you describe for this committee the connection between the bank and the IMF?

[Mark Carney]

Yes, very briefly, what we have tried to do, what Governor Dodge has tried to do, and what the Government of Canada has tried to do is to help revitalize the IMF. There are two ways to do that. I reference surveillance. I won't bore you with the details of surveillance, but the core aspect is that the IMF, in surveying economies, should be much more frank and direct in terms of their assessment of those economies, the policies the countries are following and the impact of those policies on other economies. You can think of Asian economies who may be targeting their exchange rate, running an export-oriented economic policy that has impacts in terms of the distribution of changes in exchange rate and interest rates around the world. They should be more frank and direct, and the IMF itself should serve as a forum where you get policy-makers around the table to talk more frankly to each other about what needs to be done to come to a coordinated solution.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now we'll go to Mr. Mulcair. You have seven minutes.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman.

I want to begin by welcoming Mr. Carney and thanking him for accepting our invitation, although we would have liked to have been sufficiently interesting to attract him when he was in London. But we are happy to see him today.

I also want to say that one of the first articles written about him that I read said he was taking French courses.

So, you've done that. Good for you! The answers you gave my colleagues from the Bloc Québécois reflect your academic background: you learn very quickly and your answers were excellent.

This has nothing to do with you, but I find it regrettable that, in the history of Canada, there has never been a Francophone Governor of the Bank of Canada. However, you do speak French which, by definition, makes you a Francophone. I want to extend my sincere congratulations to you on the quality of your French, as seen in the way you expressed yourself today in front of the Committee.

I am a little like my friends in the Bloc Québécois. I am somewhat concerned about the destabilization of our economy right now, with the overheating that is occurring in the oil patch. I am going to get started because I have a feeling, based on the way the meeting has been going, that we will have two rounds.

[The Chair, Conservative, Rob Merrifield]

I can't guarantee you'll be back on, but I know we will have four rounds in total.

[Thomas Mulcair, NDP, Outremont, QC]

I want to begin by asking you a question about income trusts.

In your previous position, as an expert, you played an active role in the economy, and that had a significant influence. As you know, our political party was not favourably disposed towards income trusts. However, we never lied to people the way the government did.

This is what I would like to know. In your view, in light of what has occurred with income trusts, have the basic premises that were behind your recommendation proven to be accurate? I am going to cite the specific example of Abu Dhabi National Energy Company, which has purchased certain income trusts, including PrimeWest Energy Trust.

In your opinion, are these new companies, which are now managed offshore, contributing to the Canadian economy in terms of tax revenues? That was one of the basic premises underlying the decision you presided over.

[Mark Carney]

First of all, I want to thank you for congratulating me on my French. It's probably too soon, and I apologize for that. I am going to continue to work hard.

But let me get back to your question. When the income trust decision was made by the government, as you know, I was a senior official with the Department of Finance. The role of a senior official is to provide advice and implement decisions. So, I provided advice, obviously, and the government made a decision. Parliament then approved the decision made by the government. As I see it, it's quite simple. That is the role of a senior official.

And I would like it to remain that way, because I will be the next Governor of the Bank of Canada, and the role of a Governor of the Bank of Canada is not to comment on every initiative that is approved.

[Thomas Mulcair, NDP, Outremont, QC]

I want to reassure Mr. Carney. I am not asking him to comment on the merits or appropriateness of a decision. He is here to speak to us as someone with a certain vision based on his training and experience, and we want to entrust to him one of the most important tools we have in our economy for the next seven years.

I am using a concrete case: income trusts. He made the case that income trusts lead to tax leakage and that there was a need to stop the leak.

Based on the experience since then, did that theory turn out to be accurate or has there been a realization that with foreign companies talking control of these income trusts, the tax landscape hasn't improved? This is an objective question that I'm putting to him, and not a subjective question aimed at soliciting a personal opinion.

[Mark Carney]

There are several reasons why the government made that decision, including tax leakages, questions related to productivity, and the principle of a neutral system of taxation in terms of its impact on different industry sectors, companies and regions. That is a general question which I can comment on as the next Governor.

In our opinion, because of international competition and the value of our currency, it is very important for our economy to be able to adjust. Thus it is useful for labour markets to be flexible, for there to be free trade between the provinces, and for our tax system to be as neutral as possible.

[Thomas Mulcair, NDP, Outremont, QC]

Is my time up?

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to Mr. McKay. You have five minutes in this round.

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

Thank you, Chair.

Thank you, Mr. Carney, for coming, and I want to add my personal congratulations to your anticipated appointment.

Mr. Menzies has partly anticipated some of my questions with respect to asset-backed commercial paper, and I know you've been involved in all of those discussions in Montreal. You alluded, on page 5 of your reference, to your colleague, Pierre Duguay, talking about that the facility that would provide liquidity at terms longer than overnight, and you did in part respond to Mr. Menzies on that point. If in fact that is a change, is that a policy change, a regulatory change, or a legislative change? That's question number one.

The second question is this. If in fact it is implemented, is this simply in effect the Bank of Canada bailing out an institution that made poor financial decisions because you're changing monetary policy in order to respond to the turmoil in the market?

As my third question, is that turmoil in the market in part what precipitated the interest rate cut, and would you agree with Doug Pottier's statement from Nesbitt Burns? He said, “I think it was the ongoing turmoil in financial markets and the very real risk it's morphing into a macroeconomic event.” Would you agree with that statement?

And the fourth question is--

[Mark Carney]

That was the fourth question.

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

Well, when you have five minutes, you've got to pack it in here.

The fourth question has to do with other regulatory institutions involved in these kinds of decisions. Do you think our regulatory system is up to the challenge of things such as asset-backed commercial paper risk?

[Mark Carney]

Thank you for those questions.

This issue—the new facility, policy, or regulatory change—is something we are studying. In the context of looking at it, we will have to form a judgment about whether legislative change is required in order to enact it.

Just for education—some of you may know this—the Bank of Canada has very broad powers under paragraph 18(g) of the Bank of Canada Act, but they're powers in the case of a serious financial disruption, and that has to be declared. It can be declared ex post, but it has to be formally declared and gazetted by the governor.

It has some broad powers there, and what we're looking at is not something that would fall under this, but would be...not quotidian but a more regularly used vehicle. You can think about it as potentially akin to the Federal Reserve's discount window, which has been recently used.

Then the judgment needs to be made: is there a need for legislative change? If there's a need for legislative change—obviously, we'll take a conservative view on that—we would have to come back to explain it to this committee and to the House.

I have four more questions--

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

Just before you leave that point—I'm not likely going to get them anyway—there is the issue of what a serious financial crisis is, and I've forgotten the exact phrasing. Is that the same phrasing or declaration that is needed to precipitate the guarantees that go with the asset-backed paper? There's a cascading set of guarantees on those.