Finance Committee on April 30th, 2008

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So this could change in the next three months--let's say in your next update in July or August.

[Mark Carney]

Absolutely. I expect that the projection will change in the next three months. We'll get additional information, and things will happen. We're talking about balanced risk for inflation ultimately. I understand why you're focusing on growth, but balanced risk means--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I'll tell you where I'm going with this. I think you'll understand this, being a former deputy minister in the finance department.

The budget document says that the budget surplus will be $2.3 billion this year. In that same budget document, a 1% decrease in GDP will result in a $3.3 billion reduction in the surplus. So if the GDP is even reduced by 0.7%, based on the government documents, the government will be in a deficit position. So we're very close to that.

Do we need to wait the whole year, or should we be worried about a certain recession crisis? Is something looming over the horizon that you're not telling us about?

[Mark Carney]

I'm sure my former colleagues from the Department of Finance would be happy to answer this question more fully. But I'll make the important point that for government revenues, nominal GDP is very important. Nominal GDP is not CPI plus real growth; it's the GDP deflator plus real growth.

Paul will find the page, but in this document we have the evolution of the GDP deflator or the chain-link price, which is running higher because of firm commodity prices and stronger terms of trade than might have been predicted. So when you look at those sensitivities, look at the real growth and the deflator.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand it's not black and white. The 1% will affect the budget by only $1.8 billion. I think there's enough room in the budget document to address both points. I'm particularly talking about the growth in real GDP, which worries me. In a two months, we've gone from 1.7% down to 1.4%. I think that's a worry. Because our economy is linked to the U.S. economy, we're seeing stagflation. We're seeing certain items going up and jobs being lost. The reserve has a policy of reducing interest rates while trying to maintain inflation at a certain level. This would probably require them to raise interest rates, so there seems to be a conflict.

There are a lot of issues to be addressed. It's not simply black and white. But at what point are we going to really be affected by the U.S. economy over the next couple of months? I'm worried about the next three to four months.

[Mark Carney]

I underline that we think we are being affected by the U.S. economy. That's why we have taken the decisions we have. We have incorporated the most likely effects into our projection, which you're referencing. That projection is a balanced projection, which means that there are risks on the upside—growth could be stronger—as well as on the downside.

[The Chair, Conservative, Rob Merrifield]

Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair

Thank you for joining us today. It's always a pleasure to see you, and we appreciate your coming back. My understanding is that we'll see you—what?—every six months? Is that how it works? Is it a biannual report that you'll be giving to us?

[Mark Carney]

Yes, this is a natural time to come. I'll also come as otherwise requested.

[Mike Wallace, Conservative, Burlington, ON]

Otherwise requested, thank you.

I have a constituent whose name is Mr. Frank Gue. He won't mind my saying his name, I don't think. Often he sends me discussions, his views on financial matters in this country. Just recently he sent me a letter on the issue of liquidity and the bank's position in terms of its assets compared with what it's lending out. In his view, the banks should be required to hold more capital compared with the percentage that they're lending out. I'm not sure if he's accurate or not. He says that they now run 7% to 10% of current bank assets in the ratio to what they have out in the marketplace. He thinks it should be up around 20%.

I'm interested to see if you have any comment on that.

[Mark Carney]

Thank you for the question.

Bank balance sheets, central bank balance sheets, are becoming matters of interest. It's an unusual time and we're having to deploy them in different ways. When you think about what we lend out as the Bank of Canada, the liability side of our balance sheet, the vast majority of our liabilities are bank notes that are around the country. The vast majority of our assets are Government of Canada bonds.

We have been providing some additional liquidity to the market. There's a real add-up problem here—we do some things overnight and then we do it again the next day and you don't add the two together. It's a portion of things being rolled over. Then there's the headline-grabbing $4 billion worth of term purchase and resale. In those cases, first, there's an agreement with a creditworthy institution. More important, though, we're taking assets in and applying what's called a haircut to those assets that reflect the volatility or price of those assets and the term over which we are “lending”—it's a purchase and resale agreement. So we're protected. If the counterparty were to go away, we'd have the asset. We'd realize the asset. So there's capital, if you will, in that haircut process.

That's how I would respond to your constituent.

[Mike Wallace, Conservative, Burlington, ON]

Did you want to add something?

[Mark Carney]

Did you mean the Bank of Canada or chartered banks should be holding 20%?

[Mike Wallace, Conservative, Burlington, ON]

He was talking about chartered banks.

[Mark Carney]

That's a different question. I apologize.

[Mike Wallace, Conservative, Burlington, ON]

Yes.

I don't know whether you want to comment on their asset base.

[Mark Carney]

I think the point we would make on Canadian chartered banks is that they are well capitalized. They have higher capital ratios. They're at 9% plus, or above, in terms of capital to total assets on a risk-weighted basis. They're very well capitalized versus internationally.

The issue during this slowing period in the Canadian economy is the extent to which they are going to extend their balance sheets. So we would expect some reduction in those capital ratios. As the asset side of their balance sheets goes up, they continue to lend out into the market. There is an important issue we discussed earlier on price of credit; this is an issue of availability of credit.

Just to hammer the point, to then go the banks and say, “No, you should hold 20% capital against your assets,” what that would do is restrict credit for Canadians, Canadian business.

[Mike Wallace, Conservative, Burlington, ON]

I'll make sure he gets that answer.

I have only one other question. I have your monetary policy report that you sent out this week. Then, yesterday, we had the Government of Newfoundland talk about the position they're in, in terms of—

[The Chair, Conservative, Rob Merrifield]

Very quickly.

[Mike Wallace, Conservative, Burlington, ON]

I'm sorry.

My point is that different parts of the country are performing at different levels in the economy—let's put it that way. In your thinking or your planning on a national monetary policy, can you take that into account or not? I'm interested in how you'd deal with those issues.

[Mark Carney]

It's absolutely an important question. We certainly look at different regions, different sectors, how they're performing, but we have to manage monetary policy for Canada as a whole. The national aggregates, how the economy is performing, and inflation are a national phenomenon. So absolutely, in the end, for decisions, we look at monetary policy for Canada.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Monsieur Mulcair, the floor is your.

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Chairman, I would like to come back to a question we talked about a little earlier: non-bank asset-backed commercial paper.

Governor, this drama took on a human face when our Committee met with a couple, the Miles family. What was involved were the retirement savings of this couple, and they were not even aware of the risks they were taking. It is not the bank that sold the couple this product directly, but a wholesaler.

During your last appearance before the Committee, you stated that there will always be a corporate or commercial law lawyer to build a new investment vehicle. But as long as a mechanism based upon our intrinsic values, and not on the value of goods, is not put in place, there will always be someone to fall through the cracks.

Apart from appealing to our values, what might we do, concretely, to help the Miles family or others, so that in the future this type of vehicle is not constructed and sold to individuals?

The banks should keep their eyes wide open, and they have a lot of lawyers at their disposal. I am a lawyer and I do not want to take work away from the legal profession. However, is there anything concrete to be done in a case such of this for individual investors?

[Mark Carney]

That is a very important question that touches upon the responsibilities that now fall to the provincial securities commissions. Certain securities are exempt. The transparency rules that apply to these securities are not as strict. The criteria that must be fulfilled in order to purchase an exempted security are very low. We have just talked about transparency with Mr. McCallum. In our view, it is important to have in place principles of transparency, but, there again, this is a matter for the securities commissions.

[Thomas Mulcair, NDP, Outremont, QC]

Even if, when we talk about sustainable development, we spontaneously think of the environment, part of your discourse and of your responsibility also involves sustainable development that can be maintained over the long term. You talked earlier about changes in the labour market. You stated that we were losing a tremendous number of jobs in the manufacturing sector and that we were creating other jobs, in the services sector in particular. It is true, and much has been said about this during our question period here today. If we look at job statistics without doing any processing work whatsoever, that is the case.

Along the Laurentian Autoroute, at Boisbriand, the GM plant provided $28 or $32 an hour jobs and, most importantly, pensions. This image is striking because today there is a shopping mall where the plant used to be. Of course, a job in clothing retail at $10 or $12 an hour is a job nevertheless. One can simply consider the number of jobs, but what about sustainable economic development? In the first case, the salary is sufficient to raise a family on, and, long term, there is no need to provide for the retirement of that worker. However, those people who earn minimum wage have difficulty making ends meet and, in the long term, they will be much more dependent upon the State than they are today. This situation affects a lot of people.

Is this part of your reflection and analysis?