Finance Committee on June 6th, 2013

[Scott Brison, Liberal, Kings—Hants, NS]

Governor Carney welcomed the move to tighten the rules from 40-year mortgages to 25-year mortgages. He called the move, when he was before this committee, desirable and prudent. Would you agree with Governor Carney?

[Stephen S. Poloz]

In the conditions we found ourselves in, I would absolutely. I have only so many tools in the tool kit. In fact, at the Bank of Canada we really have only one, so you can't control everything. Fortunately there's a bigger team that's concerned with financial stability. So in the context, I believe those were the right changes to make.

[Scott Brison, Liberal, Kings—Hants, NS]

Would you agree logically that it was imprudent to loosen the rules and allow 40-year mortgages with no down payment in 2006? You have opined on one. I assume you're prepared to opine on the other.

[Stephen S. Poloz]

I did preface my remarks by saying “in the conditions we found ourselves in”. That is something that I think you would look at on a continuous basis depending on the context in which we found ourselves. Certainly for what we see right now and for the foreseeable future, this is the appropriate setting.

[Scott Brison, Liberal, Kings—Hants, NS]

Earlier this year, Moody's downgraded six of Canada's biggest banks citing concerns over consumer debt levels and inflated housing prices. Was this an overreaction?

[Stephen S. Poloz]

I won't comment on the methodologies that credit-rating agencies use. But it is their job, at least—people pay them for this—to look out and see whether the fundamentals of an institution are strengthening or easing back. In the kind of environment we find ourselves, any analyst would ask those questions. How they reached the conclusion that it requires a downgrade is not part of my tool kit.

[Scott Brison, Liberal, Kings—Hants, NS]

What are the biggest risks facing Canadian banks today?

[Stephen S. Poloz]

I think the risks that a Canadian bank would face today would be similar to the ones that we face. We believe that the world economy is strengthening. All the signs that we look at suggest that countries are either at bottom or strengthening, which is—

[Scott Brison, Liberal, Kings—Hants, NS]

Would household debt be the biggest risk?

[Stephen S. Poloz]

Household debt certainly makes the list of risks that it would face, and of course knowing that—

[The Chair, Conservative, James Rajotte]

You have one minute.

[Scott Brison, Liberal, Kings—Hants, NS]

Would it make the list of risks or would it perhaps be one of the most important risks?

[Stephen S. Poloz]

It is obviously an important risk. I'm not going to rank my risks but it is an important risk. It is a risk because we don't think the current situation will last forever. At some point, interest rates are going to rise to a more normal level, and at that time, I hope the people who have those mortgages are fully prepared for that. But since we don't know if they're fully prepared for that, an analyst might identify that as a risk to a bank. That's where I would stop.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

We'll go to Ms. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I, too, would like to congratulate you, Governor, on your new role. Since it's our first opportunity to meet and get to know you, I'd like to follow up on some of the questions that Mr. Jean was exploring. You talked about your time with EDC. I understand that you joined them back in 1999 as vice-president and chief economist. You were then named senior vice-president, corporate affairs, in 2004, and you have been president and CEO since 2011.

Can you talk a little bit about what those roles entailed and how they provided some experience that will support you in your new role as Governor of the Bank of Canada, given the challenging times we face, as you articulated so clearly in your opening comments?

[Stephen S. Poloz]

Thank you very much for your question.

I think it's fairly evident that being a chief economist of any kind of a financial institution is a helpful piece of experience to have. In the case of EDC, it's primarily focused on international economies and how that feeds back to the Canadian export community, but in any case, it still requires a breadth of understanding of monetary policy issues as well.

Moving on from that, corporate affairs involved planning, government relations, those kinds of things, which are important for my community in Ottawa—and then I moved on to one you didn't mention, which was that during the crisis I was the head of EDC's lending operations.

In a given year, EDC would normally lend something like $12 billion to $14 billion or 800 to 1,000 individual loans. Most of them are smaller loans. Some of them, of course, are larger loans. During the crisis, in the budget that year we were asked to move out into the domestic market to complement the offering from Canadian banks in order to offset any credit crunch symptoms that were emerging.

So during the crisis, that's where I was. I was a very busy banker. We would have companies that had half as much credit as they needed because one of their lenders—often a third-tier bank—had decided it could not renew its credit facility. So in that situation we did a lot more lending, always in partnership with the Canadian banks. That experience gave me two things: it gave me an intimate conversation with a lot of large and very small Canadian companies, so I understood it through their lens; and, second, I got to know their bankers and worked with their bankers to get credit packages that would get them through the crisis period and out the other side.

A lot of great companies were saved during that process.

So that all adds up, I think, to a pretty diverse tool kit, as I was saying to Mr. Jean.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Great. And, of course, the Governor of the Bank of Canada is familiar territory. I noted that you had 14 years of experience with the bank, where you played a number of important roles, including being the bank's representative at the International Monetary Fund in Washington.

I'd like you to focus on your time with the banks, specifically regarding your work related to the monetary policy, and tell us a little bit more about the work you've done in this area, and again how that's going to guide you in your new role.

[Stephen S. Poloz]

Thank you.

Yes, when I arrived at the bank in 1981, for the second time, for my full-time job, we didn't have inflation targets then. We had money targets and they were posing some difficulties at the time, and since my thesis had been on exactly that, I was able to.... I was hoping to save the money targets, but in fact I just proved that they were unreliable, en passant, and so as a result Governor Bouey dropped that target.

What happened next was a big phase of heavy research for the new holy grail of monetary policy—and just coincidentally, Mr. Macklem was my colleague through that time. He came and joined the team, I think, in 1984, and we worked together on this, looking at alternatives. Through that decade, we looked at a lot of things, as I said, but in the end we ended up with inflation targets as the easiest thing to explain, the most direct thing to go after. It was during that phase that we decided that a two-percentage point margin would give us the zone of manoeuvre that we needed, and so on.

Those were formative years for me. I left the bank in 1995, just after the actual.... We've had the targets in place since 1991. By 1995 we were down to 2% as the target, which is where we are today. So I was there during those formative years.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. McLeod.

You have the floor, Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair.

Welcome, Governor Poloz.

In 2005, before the financial crisis, you gave a speech to the Board of Trade of Metropolitan Montreal in which you said the following:

Accordingly, Canadian companies are well-positioned to take advantage of a solid global economy, good domestic fundamentals, low financing costs and a strong Canadian dollar, to elevate their productivity onto a whole new level. In effect, we are suggesting that they will increasingly use international trade as a tool of supply, a tool that boosts efficiency…

Of course, that was before the financial crisis. Since then, we have seen that the exchange rate and its equivalent purchasing power did not follow suit. Central banks in other countries that were affected by the economic crisis bought massive quantities of our currency and our bonds, which created an upward pressure on our dollar. As a result, companies did not invest to the extent we would have liked.

What do you feel is the importance of the strength of the Canadian dollar in the crisis of Canadian productivity?

Will the transition that seems to be getting started in the economy at the moment, after the crisis, be the motivation for companies to invest more?

[Stephen S. Poloz]

Thank you for the question.

In that context, it is clear that Canadian companies are going to face a major challenge. The fact that the dollar is a little high increases the size of that challenge.

In terms of productivity, we can see that there are some excellent examples when we talk to business representatives individually. But it is not clear in the data we have at our disposal. It is a bit of a mystery. I suppose there are some problems in comparing and accumulating information.

Whatever the reason, it is clear that our productivity is weaker than we would like. The fact that the dollar is high might let businesses buy machinery and equipment at lower-than-normal prices. But that is a trend that we are not really seeing at the moment. We are still waiting for the time when business confidence is high enough for them to decide to make those kinds of purchases. The situation varies from business to business. But it is clear that the global economic uncertainty is making it very difficult to decide whether it is the time to make investments by buying something very expensive.

Personally, I am confident that there will be a gradual progression. But it is not generally clear at the moment.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

There has always been a large gap in productivity between Canada and the United States. Reducing that gap was actually one of the goals that prompted us to sign NAFTA. But the gap has not shrunk. On the contrary, it has grown.

What do you see as the reasons why we have not been able to find a solution to the productivity issue? You say that, at a microeconomic level, there seem to be signs of progress. But that is not visible on a macroeconomic level.

According to the Bank of Canada, and in your opinion as its new governor, how can we get the tools we need to increase productivity?

[Stephen S. Poloz]

Thank you for the question.

The most important factor—and really the only one that the Bank of Canada can provide—is an environment that keeps prices stable. By that I mean a predictable environment, with minimal uncertainty, so that businesses can plan ahead.

However, as I have already mentioned, the issue of productivity is very complex and varies from business to business. For example, how do we measure the productivity of a company whose scope is international? Do we measure only the Canadian part or all or it?

In Canada today, what Canadian businesses sell equals our exports. That is to say that there is a second Canadian economy in the world that is not directly included in the statistics. These are operations—including manufacturing—that are part of what businesses do and that are really very productive.

There is also research, development, management and so on in Canada that is very difficult to measure in terms of productivity. Is the productivity of a company like Bombardier Aerospace comparable to Boeing's, for example? Not really; it is like comparing apples to oranges. Comparison is not possible.

This is not to say that no gap exists. It does. The question deals with our long-term performance and it is a very complex one. I cannot answer it completely today.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Caron.

Mr. Adler, please. It's your round.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair.

I want to welcome the new governor to the finance committee.

Congratulations on your appointment, Mr. Poloz.

I do want to pursue some of the remarks you made in your statement, particularly where you say that the global economy continues to struggle and that there won't be recovery in the usual sense, but that it's more like a post-war reconstruction.

I want to ask you to expand on that. What in your mind are the short- and long-term challenges facing the Canadian economy right now?