Finance Committee on June 6th, 2013

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

I want to welcome you too, Mr. Poloz.

I found the look back to your early years to be incredible. I feel that Canadians watching us and listening to you are going to be very happy to see who the new governor of the Bank of Canada is. Thank you; your personal and professional story is very impressive.

I do want to take a moment, Governor, if you would allow me, to go back to your opening statement. On page 3, you make a comment in your statement that we have made significant strides on other market infrastructure reforms, which we can address in detail during our discussion.

I'd like to give you that opportunity, if you'd like, to address what you said in your opening statement.

[Stephen S. Poloz]

Thank you.

Thank you for your other comments.

Yes, most of what we've talked about this morning has been about the economic cycle, what the crisis did to us, and what the recovery's looked like so far and what we hope it will look like as it further progresses.

On the other side of this is a global imperative that we modernize the global financial architecture. It's just like an old building: it did well and then along comes an earthquake that was totally unexpected—off the Richter scale if you like—and proved to be almost too big to handle.

The financial sector most importantly is a global marketplace, so all of this needs to be fully coordinated at the global level; hence, the activities of the Bank for International Settlements, and the FSB, which Governor Carney heads up at this point. So that gives us the opportunity to all talk about what are the needs, to agree on principles, and then everybody does the same thing, so that we get a level playing field. It's a very important ingredient.

Since then, there's been a massive strengthening in capitalization. Most countries and certainly most banks—all of our banks—are way ahead of schedule in this. So a significant increase in capitalization, an increase in liquidity requirements that go beyond this.... If you ask me if the banking system today in Canada or globally is stronger than it was back in 2007, absolutely it is. It's more resilient today than it ever has been. Still there is work to be done, and it's a very active area.

In particular, we haven't yet found a full-fledged remedy globally for the too-big-to-fail problem, which is very important. If you have an institution that is likely to fail, it is infectious, and it infects your entire system. It therefore leads authorities to do a bailout to protect the system. We saw that a few times during this crisis.

The idea then is to create an infrastructure that allows us not to have that—what we call bail-in—or resolution plans, or both. If you have a full plan of how a particular institution would be resolved if it ran into those kinds of problems, then you just tell everybody it's happening, and then it doesn't infect the rest of the system. That's a very simplistic way to summarize it. It's a very complex issue because financial systems vary a lot around the world. Again, we're looking for the level playing field where everybody can do the same thing. So it will be ongoing, but I'm very encouraged by that progress.

[Shelly Glover, Conservative, Saint Boniface, MB]

The government has been seized with this issue. As you know, in the last budget there was talk of strengthening that. Did you think that was appropriate?

[Stephen S. Poloz]

Absolutely, and as I mentioned earlier on, it's fully a team effort. This is the responsibility of the Minister of Finance, not of the Bank of Canada per se. The Bank of Canada participates more as an adviser, providing deeper research, that kind of thing. We sit at the table with OSFI, with CDIC, and the ministry of Finance, as a very strong team.

[Shelly Glover, Conservative, Saint Boniface, MB]

I appreciate that.

There was some talk about trade. What do you think is the challenge or barrier to engaging companies in aggressively pursuing their own ability to trade in emerging markets? Is there a challenge there that we might be able to address?

[The Chair, Conservative, James Rajotte]

A brief response, please, Governor.

[Stephen S. Poloz]

Certainly. Thank you.

I'd say the challenge is more the unknown, if anything. If you've never gone on a plane to India to sell some stuff, it can be quite a challenge. What companies have discovered is that what the big emerging markets, like India, Brazil, and China, look for is to see you at the chamber of commerce luncheon every couple of weeks and to get to know you. In other words, they want your feet on the ground.

This model that companies are adopting is having a presence and making an investment in that foreign market to get a toehold. That builds the bridge of trade. That takes more confidence and more money than simply going with a suitcase full of samples and making a sale. The trade model is becoming more challenging, more sophisticated, and more reliant on the trade deals to help cover up all those issues that come with a more complex transaction.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Glover.

Governor, I want to ask you about a report by the C.D. Howe Institute, entitled The Dangers of an Extended Period of Low Interest Rates: Why The Bank of Canada Should Start Raising Them Now. It's a very interesting report. It's quite persuasive. One of their statements is:

Low interest rates have given Canadian consumers an incentive to accumulate a record proportion of household debt compared with their income, despite increasingly restrictive regulations on mortgage credit and warnings by the Bank of Canada of the dangers of excessive debt.

It also talks about the effect of low interest rates over a long period of time on pension funds and insurance companies. It talks about younger people who are investing, perhaps purchasing a home for the first time, and the effect on retired Canadians with respect to pension funds and insurance companies. It makes a pretty strong case for raising rates, at least in the short- and medium-term. I would like your reaction to that.

[Stephen S. Poloz]

Thank you, Chair.

By the way, that report was penned by one of my former colleagues at the Bank of Canada, Paul Masson, so I'm familiar with the work. However, it's only one side of the balance sheet that I carry in my head.

Given the circumstances we found ourselves in, as I discussed in my opening remarks, that of preserving our price-stability target and getting the Canadian economy through the crisis, this was the tool that we had available, the tool of very, very low interest rates. We know that it had the positive effects that we needed at the time, and we also knew well before this paper was put out that it has attendant consequences that accumulate in the longer term. Does "low for long", which is the phrase that we use, give us these risks? The risks that are identified there are absolutely correct. Those are the same risks we've talked about before. We have to ask ourselves if those risks are more, or less, important than the other risks we are offsetting with that policy. So it's a more complex trade-off than is implied by that analysis.

We certainly believe that as the world heals, interest rates will rise as described. That's exactly what we need. But it will be consistent with our inflation target, which is to get around 2%, so that we're back where we belong. For now, this is where we are. We are cognizant of those risks. We don't see evidence of those risks manifesting themselves in a threatening way at this stage, but they will be carefully monitored. That trade-off continues to be made as we go along.

[The Chair, Conservative, James Rajotte]

One of the main concerns, as mentioned by one of the members here, was raised in the past by Governor Carney with respect to personal household dept.

Looking at generational lessons, my grandparents' lesson was that of the Great Depression. For my parents it was paying down a mortgage at very high rates. A generational lesson for someone in their twenties today is that rates will be low for a very long period of time; therefore, it's almost prudent from their point of view to take on more dept than is prudent with rates at a higher level.

To get some further reaction to that, are you concerned about the generational lesson that's being given to young people today in their twenties and early thirties, in terms of personal debt?

[Stephen S. Poloz]

Thank you.

I am concerned. My concern is that we do the right things to ensure that this does not last for a generation. That is exactly what the policy is about, that the low rate, hopefully for not too long, gives you the outcomes you need to get through this crisis. Then as the world unfolds, we get back to normal. That's our outlook.

I want to emphasize that we're not alone in this. The Bank of Canada is capable of doing only one thing, which is to provide the right environment for the decisions that people, such as young people, would make in a price-stable environment, with a stable financial system. But if we are concerned about some of these risks, there are other tools, such as the mortgage adjustments that the finance minister has made. There's your team effort in action, which is very good.

I think the bank has been careful to continue to remind people that interest rates will be going up at some point. The consequence of that is that when young people are deciding to carry more debt than their parents did, let's say, at this age, they must do the arithmetic to ensure that they will be able to manage it at a higher interest rate, a more normal interest rate, let me say. In that context we believe the prudence is there, both on the lender's part and on the borrower's part and we've done our best to make sure it turns out well.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go back to Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

I want to return to the point that you stressed throughout your statement this morning, Mr. Governor, which is about confidence and confidence in our economy. Your predecessor had highlighted the over $600 billion in cash and cash-like assets on corporate balance sheets. He highlighted this as a problem. At the time he called it “dead money”. It was a concern that he was raising, because businesses saw no place to invest their money in the current business climate. So it does go to the notion of confidence in the economy and the outlook for the economy.

First of all, do you agree with Mr. Carney's assessment that this money is “dead money”? If so, how do you recommend addressing the problem? I will preface this by saying that in your statement you talked about foreign demand needing to recover as a precondition for companies to invest and expand. Is that a correct understanding of your approach?

[Stephen S. Poloz]

Thank you for the question.

As for dead money, I believe my predecessor himself has declared it resurrected. Our characterization of that is a little different. It would be that, in effect, companies in Canada have healthy balance sheets, and that's a good thing. The process that I described before will be much more difficult if foreign demand is building and our confidence gets up and we don't have the balance sheet available to do the job. Then we will have a different problem.

One of the most important ingredients to getting the investment momentum that we expect to see is having a healthy balance sheet and being ready, and being in a position to do the kind of due diligence that companies do before making a sizable investment.

Part of that due diligence would be understanding what's going on in China, what's going on in Latin America, and what's going on in Europe, and whether that is going to resolve itself. Companies will have to decide whether or not they have sufficient assurance that investment will pay off for them and that it is time to act. When uncertainty is high, they wait. In that sense a healthy balance sheet is good, but of course it's waiting to be put into action.

I find that what we're looking for—as you said, the preconditions—is emerging and we don't really know at what point it will tip the balance and we will get that. As I said, the data are sufficiently slow that it could already be occurring. Certainly the people I speak to are feeling reasonably confident. They're concerned about what's going on in Europe. They have a question mark, let's say, about China, but they're more or less ready. In that sense, I'm feeling reasonably confident, but it's a question mark and I have to admit to you that I just don't know.

[Peggy Nash, NDP, Parkdale—High Park, ON]

At the time, both the governor and the finance minister had tried very actively to encourage business to invest in a perhaps more front-loaded way their actions. But the previous governor also was very concerned about weak export growth. I assume that as the former head of EDC, this must concern you as well. Governor Carney said this has been one of the major struggles for the economic recovery. Would you agree, and do you share that concern?

[Stephen S. Poloz]

Thank you.

Yes, I do. The story we're talking about—healthy balance sheets, getting ready to invest, and being confident—is not uniquely but heavily influenced in the export sector. It's in that sector where we had disproportionate damage of the type we've talked about, because it was foreign demand that did the biggest collapse. It was our best trading partner that had the biggest trauma. And it has been slow to come back.

The adjustment has taken the form of finding new growth areas to invest in—keeping interest in the U.S.; we'll never lose that as our most important trade channel. Those, as I mentioned earlier, are in places that feel a little more exotic. It takes more to get your due diligence done, and so on.

We're seeing signs that it is happening. I'm confident that it will grow from here. We'll have to just continue this dialogue, because it simply isn't happening, altogether, yet.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Nash.

We're going to go to Mr. Jean again, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

It's a great opportunity to be able to have two sets of questions to ask you. I certainly am impressed with the choice by the government.

But I would like to talk a bit about what's near and dear to my heart, which is the regionalization of Canada's economy based upon pockets of high employment and other pockets of low employment. I speak specifically about our export market, oil sands. I'm from Fort McMurray, so I'm very passionate about that particular issue.

I see this morning, for instance, that oil sands are discounting between $30 million and $50 million per day because of a constrained pipeline. I looked at the market this morning and I saw that LNG is about $4.16 per billion cubic feet here in North America. In Asia it is $14, almost $10 more, three times the price. And in Europe it is $11.50 per billion cubic feet per day.

We know that the low price here in North America is primarily as a result of our having the constraint of delivery mechanisms to other countries, even though there's high demand from the United States. So we have one market. How great is that risk to the Canadian economy, first of all? And how do we continue to explore ways to eliminate that risk? What can we do to take advantage of the pockets of high employment areas vis-à-vis other parts of the country?

[Stephen S. Poloz]

Thank you. There are actually lots of questions in there, so I'll do my utmost to touch on them.

First of all, let's begin with the premise that we are very lucky that we have these resources. Whenever we get to develop them and sell them to the rest of the world, up until now it has been like money in the bank. It's one of these things that may take time; however, we know it's money in the bank. So we're working on it.

I remember the days when for natural gas, we didn't have any liquefaction terminals, nor the ability to move it around. So it was a closed pipeline, North American market. It was completely divorced from global fundamentals. Now it's a little less divorced, because we can liquefy and export and so on. This shows you, again, exactly what can happen in the oil space, where if you have a constraint, you won't have an equivalence of the price here and the price out in the world.

All I can suggest is that as these infrastructures are developed in various ways, we have every reason to think that over time we become part of a truly global market. But the constraints, hopefully, will go away through time.

As to the implications for regionalization, if you like—or perhaps regional imbalances of economic activity is maybe the way to put it—I'm very heartened by the way we have adjusted to developments over the last five years.

If we cast ourselves back 20 or 30 years, it seems to me we would not have adjusted as well. It seems as though in Canada, our ability to adapt to these kinds of shocks has improved. People are more mobile. People react to these pressures, and off they go. That's great to see. It means that over time, hopefully over the next 20 years, those kinds of imbalances, regional ones, would be fewer than they had been in the past, because of those adjustments.

Bear in mind that when there is one like that, it's usually because somebody has decided that something we have is worth a lot more than it used to be. So we all benefit from that, because that's just more money coming in. And it's something worth adjusting to.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

If we don't solve this constraint issue with oil pipeline capacity—for instance, to another coast—do you see this as a real threat to the economy? I say this specifically because right now we have about 300,000 to 350,000 people employed directly or indirectly by the oil sands. That's somewhere between 8% and 12% of the GDP of the country, and the base is expected to triple. In essence, by 2030 we're expected to have somewhere in the neighborhood of one million people in Canada employed directly or indirectly by the oil sands.

Do you see that if we don't fix this constraint issue we are going to have an even bigger discount to United States oil prices?

[The Chair, Conservative, James Rajotte]

Please give just a brief response, Governor.

[Stephen S. Poloz]

Thank you. I can make this one really brief, because I simply don't know the answer.

You're talking here about a 30-year story. A lot can happen in that time, and while it's clear that part of that story can't come true without our also making some kind of investment in infrastructure, it obviously won't have much to do with monetary policy. It will be something we'll have to take into account in the ways you describe, when figuring out the macro-implications for Canada.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

We'll go to Mr. Brison, please.

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

Governor, following on your exchange with Mr. Jean, let me ask how important commodity demand will be to the recovery of the Canadian economy.

[Stephen S. Poloz]

I suggest that it's a foundation for our growth and is likely to remain very important.

How much more or less important it becomes, I really couldn't say. What I do know is that we are still in a development phase, in countries such as China or India, where growth itself, which is high, is fairly commodity-intensive, unlike growth in our own economy, which is less so. This means that as a result we get a leveraged effect of higher growth: one more dollar's worth of growth in China has a disproportionate impact upon us, through that commodity effect—either through the price or as a result of the volume itself.

It will fuel Canada's growth as far out as you and I can see. There's lots of untapped potential in Canada.