Finance Committee on March 5th, 2009

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

I will take the last comment made by our colleague, Mr. Menzies, as my starting point. Indeed, many of Canada's actions in regulating our banking system can be envied.

Yesterday, I had the opportunity to meet with John Rodriguez, who is the mayor of Sudbury, Ontario. In the past, Mr. Rodriguez waged the epic battle led by the New Democratic Party at a time when Canadian banks were doing everything possible to free their restraints and were complaining that they did not have the right to do the same as our American neighbours south of the border. At the time, certain people were blaming us for not seeing the big picture and not understanding that if we just let the banks do what they wanted, they could work wonders, just like the Americans. It feels great to acknowledge the historic role played by people like Mr. Rodriguez, whose actions are the reason why we now have a system which is the envy of many.

We have had one round of questions and addressed various subjects. My time is relatively limited, and therefore restricted to focusing on one topic, a topic that was alluded to, but not really explored. Given the context, it is rather important. Mr. Menzies talked about one of the « preconditions » at the international level. You yourself used the term « precondition », whereas I would prefer to use the term « prerequisite condition » or « condition precedent ». You talked about confidence being a precondition to successful recovery of our economy. I must admit that we are rather spoiled to have a man of Mr. Mark Carney's calibre at the helm during a time of crisis. He has our total confidence. He gave what Mr. McCallum called a rather optimistic outlook. Yet, I myself have always read into Mr. Carney's optimism an attempt to instill confidence in better times ahead.

You also talked about—and I made note of this—the requirement for transparency and what you referred to as clear disclosure. Of course, this applies in the context of asset-backed commercial paper. Do you not believe that this clear disclosure must be a condition fulfilled in the public interest as the government introduces measures to stimulate the economy? Is this approach to guarantee accountability in the clearest, most transparent, most straightforward way possible, not part and parcel of all legitimate efforts to revive the economy?

[Pierre Duguay]

Absolutely.

I spoke about transparency and ABCP, but clearly transparency goes far beyond asset-backed commercial paper. As you know, when it comes to monetary policy, the Bank of Canada is committed to being transparent and accountable for its actions. This applies to both monetary policy and all our other initiatives. When one is trying to maintain confidence, transparency and frank, honest and open communications are of the utmost importance.

As for our forecast, which intended to maintain confidence, the governor said that it was neither optimistic nor pessimistic, but rather, it was realistic. Of course, the forecast depends on many factors. It bears witness to a great deal of uncertainty. Recent data has been weaker than what was forecast in the update of the monetary policy report. We indicated that there were some risks relating to the 3.8% rate. Nevertheless, we are of the opinion that this forecast is realistic. To give people confidence, we must explain what is behind this forecast, that is to say, a monetary and financial stimulus. We are reminding people that it takes time for these stimuli to be felt. There will be a series of negative numbers, but it is important to look to the future and consider the fact that there are many stimuli within the system.

Furthermore, with regard to confidence, I must specify that the Bank of Canada has a framework for formulating monetary policy. Our target is an inflation rate of 2%, and we will do everything in our power to reach this target. We have the ammunition to do so. We are not short of ammunition.

[Thomas Mulcair, NDP, Outremont, QC]

You have anticipated my second and last question. We only have a limited amount of time, Mr. Duguay.

Réal Caouette and Camil Samson must be laughing somewhere, as they watch the Americans print all this money. For decades, everyone made fun of the créditistes. People would say that their only goal was to print more money. These days, the situation is such that we are having a hard time finding the right terminology in French. The English word trillion is actually un billion in French. The newscasters have started to speak of one thousand billion because so few people know that a trillion is actually un billion in French.

In any event, trillions of dollars are being printed. In the final analysis, is it possible that such a flow of money into the system may not produce an inflation rate clearly above the 2% that you just mentioned?

[Pierre Duguay]

No, because we would not let that happen.

First of all, the trillions of dollars that we are talking about show an increase in debt, not an increase in monetary supply. In a way, the increase in the money supply will be in keeping with the public's needs. During a crisis, when people are fearful, there may be an increased demand for currency.

[Thomas Mulcair, NDP, Outremont, QC]

What you're saying applies to Canada, but not to the United States.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Mulcair.

Mr. McKay is next, please, for five minutes.

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

Thank you, witness.

It seems to me that the 800-pound gorilla in the room is the Caisse de dépôt. Recently it announced losses of something in the order of about 25% of its portfolio, about $40 billion, an enormous amount of money—$12 billion to $14 billion of which was asset-backed commercial paper. Much of the loss was due to a fairly aggressive lending strategy, which has certainly backfired in this particular economy.

The losses are so massive and the pension plan so at risk that certainly the people of Quebec are at risk. But presumably, with the expanded list of assets that you will purchase from pension plans and others—the counterparties, as they're called—you will be asked to purchase some assets from Caisse de dépôt to stabilize its situation. Can you advise us whether any conversations have been held to that effect, and whether that analysis, namely, that this is a massive loss, will require intervention on the part of the Bank of Canada?

[Pierre Duguay]

Sorry, will require...?

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

Will require intervention by the Bank of Canada.

[Pierre Duguay]

The losses at the Caisse de dépôt are, of course, from ABCP, but are basically losses on the stock market. The stock markets have declined. Just as there was some exuberance earlier, fears are currently being reflected in the markets. The point is that over time, some recovery in the stock market will be expected. So it's not clear that those losses per se are necessarily putting pensions at risk, because the pensions have a long horizon to recover some of the losses.

Now, what the Bank of Canada doesn't do is to provide capital. If there is any need for capital, it would have to come from government. As I said, in Canada we don't see the need for capital; but the Bank of Canada would not, in any case, be providing capital. The Bank of Canada is providing financing, it's providing liquidity, providing loans, in a sense.

If you were to look at our new facility, for example, which we just announced last week, we will be taking a number of securities—corporate bonds, for example, or commercial paper, and some bank-sponsored ABCP—and we will be providing liquidity against those, basically to meet the liquidity needs of institutions, which could be pension funds—

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

You, or the government, I suppose, have already picked up a $3.5-billion contingent liability for the asset-backed commercial paper. So the question really is, are you anticipating being asked to provide similar sorts of asset purchases in order to stabilize the demands on the pension plan?

[Pierre Duguay]

The short answer is no. The $3.5 billion you talked about is not from the Bank of Canada, but from the Government of Canada, which provides those guarantees. As I said, the Bank of Canada does not provide guarantees; the Bank of Canada does not provide capital. This is a fiscal issue, in a sense. Our mandate is to provide liquidity, to create money as needed, in order to achieve our monetary policy objective.

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

So would the overall pension system, primarily led by the Caisse, effectively require you to start printing money?

[Pierre Duguay]

No. Printing of money is done for monetary policy purposes; it's not done to address specific losses of any investors. We would be printing money if there were a demand for money to make the economy go around, if I may put it that way.

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

But that is liquidity.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McKay.

Monsieur Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chairman.

Good morning, Mr. Duguay. I'm pleased to see you today.

In Quebec, these infamous asset-backed commercial papers have had a tremendous impact on our large financial institutions and, to a large extent, have resulted in their losses. Earlier, my colleague referred to the Caisse de dépôt et placement. Quebeckers put their savings in this caisse in order to watch their money grow. Many other financial institutions have been affected as well, including the Mouvement Desjardins and the Banque Nationale. This is a very serious topic. We have yet to receive a full explanation regarding the shakeout of these assets. And yet, the rating agencies gave these securities a very high grade. That is one aspect.

My question will therefore be about the rating agencies. I thought that these agencies came under the jurisdiction of the government. Recently, I asked a Department of Finance deputy minister a question on this issue. I was told that these agencies are not subject to government regulation. You said that you rated these commercial papers very negatively. However, I didn't see this anywhere.

You are deeply concerned by the current financial crisis and therefore I would ask you whether there is any need to reform the rating agencies. To whom do they report? Right now, I do not know. It is not the government. I do not know whether the Bank of Canada plays a role in this matter. In addition, these agencies receive funding from the securities issuers. So there is a type of conflict of interest. The problem is very serious.

Are you going to be suggesting that we change the financial regulation of these agencies?

[Pierre Duguay]

Thank you very much, Mr. Carrier.

Indeed, the bank already published an article on rating agencies in the Financial System Review, in December 2007 or June 2008. A small number of rating agencies operate internationally. They provide an opinion, and, for us, it is important that this opinion be clear. The rating agency simply provides an opinion based on an analysis. As far as the asset-backed commercial paper crisis is concerned, investors gave far too much weight to the rating agencies and, to some extent, did not do their homework. Investors have a responsibility to understand what they're buying and to ask questions about transparency. With respect to a situation of conflict of interest, the rating agencies need to maintain their reputation with investors, because although they are paid by the securities issuers, they will not get paid for nothing if they do not do what is deemed to be useful work, because the investors will no longer consider the opinion given by such rating agencies. I think that the rating agencies have a good incentive. Indeed, they have responded to the criticism levelled by investors, they have changed the way they do things.

Is there need for regulation? The Financial Stability Forum has made recommendations along that line for the international scene. There are some clearly different opinions, but a consensus does appear to be forming. I do not think that we will necessarily be looking to a regulation of rating agencies, but there certainly is talk about an international securities commission organization, which will establish a code of conduct for the rating agencies.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Kramp, please.

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

Thank you, Chair.

I was just thinking, when I listened to Mr. McKay's characterization of the Caisse de dépôt as an 800-pound gorilla, that perhaps the citizens of Quebec would have been better served if they were operating under national securities regulators. Maybe then it would have been only a chimpanzee.

We're really not faced with soaring inflation or even imminent deflation. In your discussions with Mr. Mulcair I heard the figure 2% come up. I'd like to know how you would actually decide what rate would be your target rate. What factors would go into that, and why would that be a healthy range? What are your predetermining factors for that?

[Pierre Duguay]

Well, in part 2% is the result of history. We started from very high inflation, and when we adopted the inflation target, inflation in Canada had been 4% and rising and we felt that it was too high. That's not price stability, and the 2% inflation target was jointly agreed to by the government and the Bank of Canada.

In difficult times, when the purpose is to get inflation down first, then of course in the early 1990s, following the recession, the recovery was slow. So in the end, when it came time to renew, although at first we had said that we'd get inflation down to 2% and then define price stability later on and decide whether we keep it or go lower, systematically we've renewed the target at 2% on our last renewal. And the Bank of Canada has done a lot of work on what would be the desirable rate of inflation. There are a number of arguments saying that it should be lower. There are not many arguments that would justify raising it. We've summarized some of that research in the past, but the last time we agreed with the government on maintaining the 2% figure we did point out that we would be very thoroughly examining what our next target should be, and we will be coming up with the results of our research before 2011.

It's premature at this point to talk about this research, but there is vibrant discussion going on. We have set up a website called inflationtargeting.ca, where some of the research papers are presented, and there is a wiki also where we get feedback from people.

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

Okay.

So it would be a fair assessment, then, to say that the Government of Canada and the Bank of Canada appear to be working hand in glove to deal with this inflationary targeting in an acceptable manner.

[Pierre Duguay]

Absolutely, because by the Bank of Canada Act, the government and the Bank of Canada, the governor, are jointly responsible for monetary policy, and the inflation target is jointly determined by the bank and the government. We are working hand in hand.

We are also, I must say, working hand in hand through this credit crisis. I did point out, for example, that in the liquidity provision we've done, we focus on the short end; the government has focused on the long-term end. At the short end, we're providing financing, but because it's not money that we're creating, the government is issuing treasury bills to finance it and depositing the proceeds at the Bank of Canada. So there is a close coordination, yes.

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

All right. Thank you very much.

Just to allay a perception—

[The Chair, Conservative, James Rajotte]

This will be the last question.