Finance Committee on March 10th, 2009

[Maxime Bernier, Conservative, Beauce, QC]

I understand that some people think that spending will get us out of the crisis, but I've just explained to you that it's not the solution.

Mr. Siegel, you offer loan guarantees to certain sectors. Do you do so in Quebec's forestry sector?

[The Chair, Conservative, James Rajotte]

A yes or no will do. The time is up, unfortunately.

[Eric Siegel]

Yes, we do. The bulk is insurance, which the banks then lend against, but we do provide direct loans as well.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

We'll go to Mr. McKay, please.

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

The first question is to Mr. Gauthier.

I understand that the essential problem here is that the insurance companies and the pension plans aren't picking up the paper once the vehicle is sold, and it's probably right and proper that the government step in and do something to free up that market. Since we last talked, has there been any real movement on the part of the banks or the pension plans to step back in and purchase this paper? Is there any discernible movement on the part of those institutions?

[Richard Gauthier]

Thank you.

There has been movement. The movement, unfortunately, has been contraction. The banks have further contracted and are moving away from our industry almost totally. We have seen banks change the terms of reference for loans prior to closing dates on properties and so on, literally walking in and saying unfortunately, because of changing conditions, we will have to modify the terms of our negotiation on the deal we had.

We had a situation last week where a bank walked into one of our dealers, a long-time dealer who has been in business for 40 years, who has a $1 million line of credit secured by a letter of credit from another bank for another $1 million, and the bank said they'd have to change the terms and increase it by 2%. When the operator questioned why that was necessary, the answer was, “Just because we can. You have nowhere to go.”

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

We're hearing that over and over again, so that's interesting.

I want to direct a question to Dr. Donner and Dr. Peters with respect to the multiplier of stimuli. You're making the argument that infrastructure is effectively your best stimulus, not tax relief and things of that nature.

The big issue for us has been the rapidity with which you can get a stimulus into the market. While in economic theory, if you will, $100 worth of infrastructure should be more stimulative than $100 worth of tax relief, the government can do tax relief today, but stimulus through infrastructure, even with the cooperation of the senior party here, is still going to go slowly into the economy.

Does your economic theory hold up given the realities of the way money flows into the economy from the government?

[Douglas Peters]

Yes. Let me just quote from the budget papers. The personal income tax measures, in the first year--that's 2009--have a 0.4 impact. For every dollar spent, you get 40¢. In the second year it's 0.9. Infrastructure spending in the first year is 1.0, two and a half times as much bang for that buck, and it's 1.5 in the second year. It's almost over half again as much impact in the second year. Now, those are not my numbers; those are from the budget papers themselves. The impact of personal income tax cuts is much less of a bang for the buck than the infrastructure spending. I presume that the people at the Department of Finance who made these calculations would have decided how quickly that was put in place.

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

This is a rather interesting issue in terms of where the rubber hits the road, though, because even accepting the multiplier effect in the budget and in economic theory, getting the stimulus out the door seems to be extraordinarily slow.

[Arthur Donner]

May I jump in? The same budget paper also pointed out that if you want the greatest bang for your tax cut, then you want to cut taxes for very low-income households. This is not surprising; you'll get a stronger economic stimulus that way.

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

We seem to be missing the economic cycle as it's going down. The stimulus will actually be hitting the economic cycle as we come out of the cycle.

[Arthur Donner]

As an outside observer to your very fascinating process, I wish you would get the stimulant dollars out much faster and more efficiently. Dr. Peters and I suggested that maybe the federal government should take a lead by being willing to spend a much larger proportion in year one.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McKay.

I'm going to take the next Conservative spot. I have three different questions. I don't know whether they can all be answered in five minutes, and if they can't be answered here in the committee, I'd appreciate a response later on.

First of all, Mr. Gauthier, you talked about getting the money into the economy now and provided some details in response to Mr. Pacetti. The program is obviously an indirect sort of way to provide financing. My first question to you is whether you have any advice on actually designing the program. If you were designing the program, with respect to the $12 billion, how you would set it up to work?

My second question would be for EDC. I would certainly second what Mr. McCallum and Mr. Kramp said. Politicians hear a lot of complaints, but I have never heard one complaint from a business about EDC, so I certainly applaud you for the anecdotal evidence and the information you provided today.

That leads to the question. What EDC does now, it seems to be doing exceptionally well. There has been a concern raised about getting an organization to move into an area that's not its area of expertise: the domestic market. Perhaps you could address that concern, which has been raised.

Thirdly, and I don't know that we'll get to this, Ms. Dickson, you talked about OSFI being involved with efforts to identify what went wrong and what changes should be made to avoid a repeat of the global market turmoil. That certainly is something that's seizing all committee members here. I don't know whether you want to talk about some of the work you're doing with other G-20 nations on this issue, but I think it's certainly something concerning which the committee would benefit from more information.

Mr. Gauthier, we'll start with you and we'll work our way down.

[Richard Gauthier]

Thank you, Mr. Chair. I know you're trying to keep a tight leash on time, so I'll be brief.

First of all, I am very happy that I'm not designing the program. The government has seen fit, obviously, to bring greater minds than mine to that task.

However, I would make the point I made at the industry stakeholder and government meeting last Friday. It was that it is imperative that the $12 billion not get bogged down. It has to go through regulated financial institutions; that is one of the conditions of the credit facility. I made the point to the chair of the meeting that it is imperative that the money not get bogged down anywhere else along the way; that it find its way in its entirety—the $12 billion—into the real economy, because this is purely a stimulus economic initiative, and it will not stimulate anything unless it actually gets into the real economy—that is, into the hands of the leasing and equipment lessors who are out there waiting to sell their product.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Siegel.

[Eric Siegel]

Thank you, Mr. Chairman.

While the focus is on the new powers that would give EDC the ability to participate more fully in the domestic market, EDC is not a stranger to doing it. In fulfilling our mandate of helping companies in their international trade objectives, very often the best way to help them is right here in Canada, with pre-shipment financing or with their bonding—all things that help create domestic credit for them. We already have an established set of products and an established set of programs, working with banks and working directly, and we're not prohibited, even without the legislation, from doing more of that. We have a degree of confidence in this already.

The legislation will allow us to engage in a more unfettered manner. At the same time, we're not there to displace the banks. We want to keep the banks as engaged as possible, because these powers are intended to be temporary. At some point it's expected that EDC will no longer be active in that space and will go back to a more normal state. We also don't want to unduly overlap with, say, somebody like BDC, which is in that space, particularly for small and medium-sized enterprises, so we're talking very closely with them.

The manner in which we intend to provide our capacity, as I said before, is in many cases by way of reinsurance. Instead of trying to compete with the private market, it's by bolstering the private market, giving them added capacity, and letting them use their client relationships and their delivery vehicles to get that capacity into the market.

[The Chair, Conservative, James Rajotte]

Thank you.

Ms. Dickson, you have about a minute, if you want to comment on that.

[Julie Dickson]

Okay.

I know that Tiff Macklem was here talking about the G-20 and what he's doing. The regulators are part of that process, and we're really focused on three things: first, whether capital is adequate and how to build buffers in good times so that they can be drawn upon in bad times; we're spending a lot of time on liquidity, because the approach to liquidity needs some refinements to ensure that banks don't run into the kinds of problems worldwide that they ran into in the past 18 months; and lastly, we're focused on compensation arrangements within financial institutions, to try to ensure that when these are developed, the institutions think about risk at the same time.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll go to Mr. Thibeault for the final round.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

I'd like to ask this question to the Hon. Mr. Peters or Mr. Donner. We're here today talking about how we can enhance credit availability. We've heard clearly, from both businesses and consumers, that interest rates are deterring them from enjoying credit availability. Maybe you could talk a little bit about what good it is to increase loans and credit, if interest rates are higher than ever and are deterring consumers and businesses from accessing credit.

[Douglas Peters]

You're quite right, there are two factors: there's credit availability and there's the price of credit. That is a real problem. When the central bank interest rates get to zero, there is very little more the central bank can do except to get into the quantitative easing fit, and that's exactly what we were discussing in our paper. The central bank should be—and I think the deputy governor mentioned when he appeared before this committee that they would have to be—considering going into quantitative easing. The Fed did so about six months ago, and there was an enormous increase in purchases of instruments in the credit market. It is exactly what is needed here to bring interest rates down in the various markets.

Now the Government of Canada has set up a mortgage repurchase scheme, which is again exactly for that purpose: to make sure that mortgage interest rates are not so high. The government will move into that market to bring those interest rates down. The central bank may have to do the same in other markets to bring those interest rates down, so that you have both the availability of credit and a reasonable interest rate.

[Arthur Donner]

If I may jump in, the Bank of Canada Act permits the central bank to buy literally any kind of asset. I think that is a very good option available to the Bank of Canada, because I think we're really into a very unknown period. My own sense, and I perhaps have never gotten this across, is that the basic problem with the worldwide economy and even the Canadian economy is insufficient spending, period. We want to get spending out. Once interest rates are zero, as my colleague said, you can't lower the rate, but you can certainly improve accessibility.

[Glenn Thibeault, NDP, Sudbury, ON]

Great. Thank you.

Relating to the Canadian secured credit facility, Ms. Dickson, one of the things the New Democrats are concerned about is transparency. Once these funds are given to the banks, how will the government ensure that they get to businesses and consumers? What type of transparency is there relating to that, if you can answer that for me?

[Julie Dickson]

I think that's a question more for the Department of Finance.

[Glenn Thibeault, NDP, Sudbury, ON]

Fair enough.

What can we do, then, to ensure that we're going to be getting some interest rates that may be legislated? We were talking about deferring spending, because we're seeing businesses not having access to it. Would you have any comments on that? I know there's been some discussion for years on legislation, in terms of having regulated rates and things along those lines.