Finance Committee on April 16th, 2020

[Stephen S. Poloz]

What I said at the time, and I guess I still feel that way, is that it really is a question for the Minister of Finance, not for the Bank of Canada. If the Government of Canada would like to have some form of borrowing hub for the provinces, that would be a government policy for them to think about.

As I've said also, our objective here is to do our best to make sure that markets behave, that they function very well. That makes it easier for the provinces to go about doing their normal business, or in this case, extraordinary business, because the demands for the immediate term, the cash needs, are going to be higher than the markets are used to dealing with. We'll be in the market, helping to make that market function well. That is not us extending credit to provinces; it is us making sure the market works so that the market can absorb that borrowing as we go through.

By the way, interest rates have fallen a lot. It's true that provincial spreads have widened a little, and they've narrowed a lot since we just announced our program yesterday, but the all-in cost is not high. Interest rates are extraordinarily low for everybody. I don't see this as an expensive period for borrowing. As I said, it's more about market function and making sure that everybody can get their business done, and we'll be there to make sure that happens.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you very much.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Marty, as you know, the Minister of Finance is up next, so that might be a question you'd want to raise.

Governor, I'll tell you, I was around in the 1980s and owed a lot of money on the farm. When interest rates were 22.5%, it was rough. Therefore, yes, interest rates are low today.

We'll go to Ms. Koutrakis, and then over to you, Elizabeth May.

Ms. Koutrakis.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you, Mr. Chair.

I'll begin by thanking Mr. Poloz and Ms. Wilkins for appearing before the finance committee today. I thank Mr. Poloz for his incredible service over the years and wish him continued success in his future challenge.

The range of monetary policies announced by the Bank of Canada is astonishing and demonstrates a commitment to ensuring that the federal government, provinces and territories, banks, businesses and individuals across Canada have the resources needed to emerge from this crisis with strength and confidence. The opportunity to discuss details of these policies with you is incredibly valuable to all of us, and thank you for that once again.

The most recent monetary policy report presents two scenarios outlining how the severity and persistence of the COVID-19 crisis might impact the Canadian economy, and we've heard a lot of that through your comments today. The federal government has put forward $107 billion in direct support and as part of a potential total package of $765 billion, including liquidity measures to keep the economy going.

I have the following two questions.

How does the Bank of Canada's planning and response change in a worst-case scenario, where we remain in a full or partial lockdown for several months? Should the Bank of Canada and the Government of Canada be planning and preparing for a worst-case scenario, and do we still have sufficient fiscal and monetary room to meet the challenge if the current lockdown continues for several more months?

[Stephen S. Poloz]

You want to explore the worst-case scenario. Let's talk about that.

First of all, as I've said a couple of times, the centrepiece of the policy response is fiscal and the most important tools in the fiscal response are what I call “elastic” tools. They will grow automatically if the shock lasts longer. I would think you'd best put that question to the finance minister. I know you're meeting with him a bit later.

I'll put it this way: In terms of the level of federal government debt from where we sit at just over 30% of the Canadian economy, imagine a household that has had a mortgage for some time and they owe 30% of their income on their mortgage. They say, “We've been in this house for 12 years now. Let's put an addition on the back. We can have a bigger kitchen and we'll make it nicer.” They go to the bank and they have to borrow about 10% of their income to do this project, so their mortgage goes from 30% of their income to 40% of their income. Then they have a nicer house, they do their thing and a number of years later they've paid it back. This is roughly the experiment that we are talking about in fiscal space. It could be as much as, let's say, if it was a bad scenario, 10% of GDP that the federal government needs to borrow and then pay off over a period of time at extraordinarily low interest rates. I don't think it's much different from what an ordinary household has done at some time in their lives.

In that sense, again, from there on, ask the finance minister what he thinks about that.

I'm getting the signal from the chair, but I want to say that the Bank of Canada policy is to provide the type of market support where that can all occur. If we are in a period of worst-case scenario as you describe, it would be a very uncertain time. Those tensions that we've been seeing in markets would persist and we would continue to do our thing.

As I've said to people, those tools can be used essentially without limit in order to sustain that market performance. Those large-scale asset purchases can be on a much bigger scale than what we're proposing to do at this point, and if that's what they had to be, that's what they would have to be. That would give us good market performance, we would get the job done, and then, of course, over time, whatever period of time the fiscal authority decided, we would pay that money back.

[The Chair, Liberal, Wayne Easter]

Governor, you're too sharp-eyed. I was giving the one-minute signal to Annie to tell her she had one more question.

[Annie Koutrakis, Liberal, Vimy, QC]

Great. Thank you, Mr. Chair.

Governor, thank you for your very thoughtful and very detailed response.

After this crisis is over, is there any way we can regain the 4% or 6% of lost growth that it will cost?

[Stephen S. Poloz]

Yes. I think the number you suggest is not an unreasonable one in terms of how much we could end up losing this year, but what will happen is that we're going below capacity, and as I said, we're going to be in a disinflationary zone. It means that the economy will be able to grow faster than its potential for a while in order to make up that lost ground, just to get us back, in level terms, to that full employment place where we were just a few months ago.

Yes, of course it's possible that there will be some structural effects to the economy to change that, but there are also arguments for there to be positive structural effects. The types of innovation you've seen during this crisis are the sorts of things that raise productivity long term. I wouldn't put that as an impossible thing either. In the end, I'm quite confident that we will make up that lost ground, but don't hold me to a timeline. It's going to take something that we measure in, say, a couple of years.

[The Chair, Liberal, Wayne Easter]

Thank you both.

We'll turn to Elizabeth May, and then to you, Ms. Gaudreau, if you want to get in.

Elizabeth, you have about five minutes. Go ahead.

[Elizabeth May, Green, Saanich—Gulf Islands, BC]

My heavens, I thought I would get one question in. Thank you, Mr Chair.

Again, thank you to colleagues for allowing me a question.

I also want to add my thanks to you, Governor Poloz, and to your senior deputy governor, Carolyn Wilkins. I don't think any Canadian would doubt that we're being extremely well served by your approach to stabilization of our markets and making sure we get through this.

I was drawn to your analogy about looking at Canada as a human being and looking at our immunity, our physical strength, going into this, and your points that we were at full employment when this hit and that our debt-to-GDP ratio was pretty healthy at the federal level.

In other countries around the world, the financial risks are again likely felt just like a human being. There are a lot of economies out there that don't have our internal resilience and don't have the robust balance sheets that Canada has. As COVID spreads and makes its way around the world, we haven't yet seen the continent of Africa with the kinds of.... There could be very bad effects of COVID-19 that we haven't seen yet in many economies around the world. How is the Bank of Canada working in that international context to coordinate with others, as I assume you are, to support more vulnerable countries to enable them to maintain their market confidence and to buffer the risks of financial stability in that global context?

[Stephen S. Poloz]

The level of international coordination has been quite high. The G7 and the G20 have been meeting regularly. This morning was the big IMF meeting, which is, of course, most of the world.

What you see is a lot of commonality across the fiscal reactions, at least in the types of tools that are being used. As I indicated earlier, I think there has been a high level of sharing. Even though it feels as though it's happening all at once, it has been a bit sequential, so it has been possible to talk among various countries as things unfolded.

I remember—it seems like a long time ago—talking to my colleague from Italy as it was just getting under way and having those insights then, which, compared with Canada's timing, was very far in advance of it. It's the same thing with South Korea. I know the governor there very well. As for China, we got great insights from the governor of the central bank of China along the way, before anybody else was really affected. That's been great, and certainly the central banks have coordinated even harder than that.

Frankly, we've been spending almost the entire week in crazy hours on Skype, meeting in the way we are doing now. I started at six o'clock this morning with my first meeting, and that's just because of the time zones.

I think we do have a sense that we're all in this together, and I think it does matter a lot to our outlook. You raise a good point, which is that it's sequential, and therefore, the recovery will also be sequential. As an important exporter, we know that our foreign counterparties will be going through it at different times, so it's not that we're going to have a simultaneous recovery, and that will affect commodity markets in the longer term. That's why I said that oil and other commodities might take a little longer to get the full benefits of a recovery.

I hope that answers your question.

[The Chair, Liberal, Wayne Easter]

You can have a fairly quick one, Elizabeth, so that Marie-Hélène will have a little time.

[Elizabeth May, Green, Saanich—Gulf Islands, BC]

I'm intrigued by your last comments, Governor. Perhaps you could shed a little bit of light.

What are we learning now from the economies that are sequentially a little ahead of us in terms of how we start and restart our economy after the COVID pandemic?

[Stephen S. Poloz]

That conversation is really just getting started. We talked a bit about that yesterday in the G20 meeting. Basically what is going on is a lot of consultation with the private sector. It almost looks a bit like grand-scale industrial planning, asking “When can you get started and what do you need?” The supply chains are so complex that there will be fits and starts. Of course, some of your supply chain is not in Canada at all.

We may be fortunate in the sense that China was at the beginning, because that's an important element in most countries' supply chains, for manufacturing at least, and of course an important customer for commodities. Some of that stuff will start to move in the early going. It's very complicated and we're not ready yet.

I know here in Canada we'll be doing the same thing, creating that consultative structure so that everybody can be better informed of what should go first, what can go first, and what would prevent it from going first. We need answers to those questions and you can only do that by talking to people.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Ms. Gaudreau, the floor is yours.

[Marie-Hélène Gaudreau, Bloc, Laurentides—Labelle, QC]

Thank you, Mr. Chair.

My question will be brief.

Mr. Poloz, you expressed surprised about the number of workers who don't qualify for employment insurance. We were talking about 7.5 million people.

[Stephen S. Poloz]

That's it.

[Marie-Hélène Gaudreau, Bloc, Laurentides—Labelle, QC]

Since employment insurance is an automatic stabilizer of the economy, in your opinion, wouldn't the economy be more stable in a time of crisis if the system covered more workers?

[Stephen S. Poloz]

Certainly.

We've known for a long time that automatic stabilizers aren't very sensitive to the economy. In another era, one study estimated that automatic stabilization was almost equivalent to a change of less than 1% in the interest rate.

Very recently, we talked about the renewal of our target and our agreement with the government on inflation targets. We live in a world where interest rates are already lower than usual. The tax authority doesn't have many stabilizing powers. In this respect, it might be better to have more automatic stabilizers in the system, or at least something more sensitive.

Ms. Wilkins is an expert in this area and she could elaborate on this issue. However, we should certainly be having this discussion right now.

Ms. Wilkins, I'll give you the floor.

[Carolyn A. Wilkins]

That's a very good question. The governor answered it well.

I would just add that, when a central bank has less leeway to change the interest rate or to use it to stabilize the economy, tax policies come into play. Automatic stabilizers are one of several tools to improve the situation.

That said, the government is certainly responsible for changing them in some way.

[Marie-Hélène Gaudreau, Bloc, Laurentides—Labelle, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Thank you, Marie-Hélène.

Governor and Deputy Governor, I have a question to throw in.

Today has been a real education, if I could call it that, on the value and the stability of some of the national institutions and agencies we have in Canada.

The question I get the most, when either the Governor of the Bank of Canada or the Minister of Finance speaks and we're talking about liquidity in the market, is this: How do you explain that in layman's terms and what does it mean for John Doe who is out here on the corner of the street and has a small business or is working for a small company? Can you explain that to us in layman's terms?

I'm sure it would be a better explanation than I'm giving.

[Stephen S. Poloz]

Let me just portray two channels for illustration. One I've mentioned before, so I can be quick. That is, John Doe perhaps owns a small business and relies on a credit line for the fluctuations in his business. He has money coming in, but of course, he has money going out, and while he's waiting for money to come in, money goes out too fast and he draws on his credit line. Then when the money comes in, he pays back his credit line. That's a very common business model.

Imagine if he woke up four weeks ago and the bank said, “Well, you've only used about a third of your credit line, so we've decided that from now on it's only going to be this much because you don't need the rest.” It would be just at the time he was thinking, “My goodness, I'm not sure I'm going to get paid by so-and-so, so I'm actually going to need that credit line to keep paying my people.”

That's what happened in 2008, because despite all the best efforts, it was a financial crisis and a credit crunch. The banks were really trying to protect their capital positions, and so on; of course they do. That was a very bad shock, and financially worse than this one—not economically worse, but financially.

That's one scenario. If the central bank comes in and says, “Well, look, Mr. Banker, here's all the liquidity you need,” and the banker says, “There's no need then for me to adjust that credit line at all, so off you go, Joe, no worries,” that's a big difference to how the economy behaves.

The other side of it is, suppose Joe decides he has money saved up and it's in the form of bonds of some kind and he just calls his broker and says, “I need so much of that money right now to weather the storm.” His broker says, “Well, I don't know. The market's caving in. I don't know if I'm going to be able to do very well with that, Joe. It's a really bad time for you to sell,” and so on. He says, “Do it anyway,” and he loses money. What's going on there is that the liquidity that's absent doesn't allow him to do his transaction in a normal way.

In behind that, there's the central bank saying, “We have to make sure that market works for Joe.” It's not just for the fancy market participants; it really does matter to Joe. We call it liquidity.

You know I'm famous for metaphors. My favourite metaphor is, when the economy goes into a place such as this, it's as though something just pops and there's a crater and the economy is falling into a hole. What we do is fill that crater up with liquidity so you can paddle your boat across it. Once you get to the other side, you don't need the hole to be filled with liquidity any more. You're back on dry land and you're back in business.

That's essentially what we're doing. We call it bridging, or whatever, but liquidity really is just like water. When we do it in one area, usually it seeps around everywhere else. Sometimes we have to do something a little special, like yesterday, to make sure of it. That's what's going on. In this whole thing, we've cut rates 150 basis points and we want to make sure the maximum effect of that finds its way all the way to your friend Joe. Right now, the markets don't quite let it happen, but they will.

[The Chair, Liberal, Wayne Easter]

Thank you very much. I said your explanation would be a lot better than mine, and it certainly was.

Governor and Senior Deputy Governor, thank you for your appearance before the committee today. We had two good hours and a real education.

I also want to thank you both, and especially you, Governor, for appearing before the committee so many times over the last number of years and basically explaining how the Bank of Canada works and answering questions in this Parliament and the previous Parliament.

I also fondly remember the tour of the Bank of Canada you gave the previous finance committee and the good discussions we had there that night to understand how the system really works, the inner workings of the Bank of Canada.

I know this might be your last appearance before the committee. These are interesting and really difficult times within Canada and globally, but I sincerely thank you on behalf of the committee and on behalf of Canadians, and if anything, you can be absolutely proud of your term as Governor of the Bank of Canada.

Governor and Senior Deputy Governor, thank you very much.

With that, we will suspend briefly and then come back and do our sound checks for the next panel, with the Minister of Finance.

[Stephen S. Poloz]

Thank you very much.

Thank you all.