Industry Committee on Feb. 26th, 2008

[The Chair, Conservative, James Rajotte]

We have three minutes.

[Paul Jenkins]

I won't comment specifically on the decisions by the U.S. Federal Reserve, but I will remind you—and I said this when we last met—that in our projection for the Canadian economy we have a projection for the U.S. economy, and in that projection for the U.S. economy we had built in a significant degree of easing on the part of the Federal Reserve, a degree of easing beyond what they have done to date. So we see, as does everyone else, the weakness in the U.S. economy, a weakness that is far greater than in our own economy, and we did see the need for the U.S. Federal Reserve to ease policies. From that point of view, there is nothing that has surprised us in terms of the direction or the orders of magnitude. In fact, our base case incorporates some additional reduction beyond what they have done to date.

In terms of other factors that we look at, clearly our focus, and rightly so, is on our 2% inflation target, but we also believe that by keeping that focus on the 2% inflation target we're providing the right stability for good overall economic performance for the Canadian economy. Of course, in targeting on that 2%, we have to assess whether the Canadian economy is weakening or growing more robustly.

What are the interest rate implications of that? We looked at the risks around that. In our report we looked at not only our base-case projection but the risks around that, and we saw both upside and downside risks. One of the downside risks we saw was indeed the possibility of a weaker U.S. economy. We've talked about that, but we also saw some risks on the upside. So the short answer to your question, Mr. Chairman, is that we look at many factors that have a bearing on the Canadian economy, because ultimately it's the performance of the Canadian economy that is going to determine the inflation rate, and we have to respond in either direction in a symmetric way to keep inflation on track and, through that, do what we can to keep the overall performance of the Canadian economy stable and growing.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jenkins.

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

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

Thank you, Mr. Chair.

I'd like to ask you whether the Bank of Canada is being too narrow in its focus on interest rates, because the former Bank of Canada governor had indicated a comfort level with the dollar in the mid to high 90s, which the Minister of Finance mistakenly took for a pegging of the dollar at that rate, which of course you don't. The comfort level with the dollar being at that level is extremely damaging to export-oriented industries. We've heard that the head of the CME, Jayson Myers, has said 85¢ is a reasonable rate. Any industry that is price-sensitive, not only in a North American context but in a global context, is going to suffer, not only from the precipitous rise of the dollar but from a dollar that is pegged to an economy with which clearly we do not have the same purchasing power.

This is my question. Is the Bank of Canada's focus only on interest rates not too narrow a focus, which is ultimately damaging, perhaps permanently, our manufacturing sector?

[Paul Jenkins]

We have one tool at our disposal, which is interest rates, and we use that tool to achieve our objective, which is our 2% inflation target. We believe by doing that we provide the best support for the Canadian economy overall.

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

Could you not be taking into account, though, the exchange rate with our largest trading partner and what that does to other sectors of the economy?

[Paul Jenkins]

We do. You're absolutely right, the exchange rate is a very critical price in the Canadian economy. There's no question about that, so we do pay very close attention to that, but we do not target the exchange rate. The exchange rate moves around in response to many factors. It moves around in response to commodity prices. When commodity prices were weak following the Asian crisis, the Canadian dollar moved down. We're going through the reverse of that at the moment, but we also have a weak U.S. economy, and that too is playing on the Canadian dollar.

Our role is to provide overall macro stability to the Canadian economy, and we do that by adjusting interest rates in a symmetric fashion, either up or down, to keep inflation on track, and through that, to have good overall economic performance.

There will always be times when one sector is suffering from a shock in a negative way whereas that same shock would be a positive development for other sectors. You've cited the manufacturing sector today and the difficulties that we understand they're going through, absolutely, in some of the smaller communities in Ontario and Quebec in particular.

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

In my own city of Toronto we've lost 125,000 manufacturing jobs.

[Paul Jenkins]

But at the same time, overall employment has gone up, and it's not just been in the resource sector, in response to your question. We've had big employment gains in construction, in the service sector, and in Toronto the financial services sector is becoming increasingly more important. So overall employment has increased in Ontario because of the growth in these—

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

But the manufacturing impact is still—

[Paul Jenkins]

Absolutely, manufacturing employment has been down. The reverse happened following the Asian crisis, where the weakness of commodity prices and the weakness of the Canadian dollar at that time led to a massive increase in employment and production in the manufacturing sector. I come back to one of my earlier comments, that these types of developments and shocks are going to take place frequently in going forward.

One of the important roles, I believe, is for us to think about the policies that promote adaptability and flexibility in response to these shocks.

[The Chair, Conservative, James Rajotte]

I'm trying to get in one more questioner. I'm sorry, we're out of time here, Ms. Nash.

Mr. Brison.

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

I have a very specific question on CDS, credit default swaps. Just as we're starting to get some handle on the scale of the impact of the subprime mortgage issue, there's the real fear of the depth and breadth of the CDS issue. The total amount of outstanding CDS derivative trades globally is $46 trillion U.S. There's great concern because there's not really a good level of understanding of them within the capital markets, and certainly not within the investment community or the average investor.

So first I'd like you to comment on the potential impact on the U.S. economy; secondly, what the fallout could be on the Canadian capital markets and economy; and thirdly, what we should be doing in terms of our financial regulatory framework to help educate and perhaps insulate investors from these increasingly opaque vehicles that are dominant but relatively invisible and misunderstood.

[Paul Jenkins]

Again, that's a very good and complicated question, in terms of a response.

Quickly, first of all, on the United States side, what we've seen is a combination of the developments in the subprime mortgage market that you've talked about and a period where the lending through the subprime mortgage market in the United States rose at a dramatic rate. We have seen the consequences of that, but at the same time, in addition to that lending, we saw a lot of these subprime mortgages being packaged as part of these structured products, these CDOs, for example, that you're talking about. So you had a combination of assets in these CDOs that were losing value, and losing value rapidly. You also have the opaqueness of these instruments that you've touched on.

One of the important issues we've talked about at some length is the importance of finding ways to enhance the transparency of these investment products. Investors need to know what's in those products. Certainly there's a considerable focus on that, both domestically and internationally, that the bank is involved in—international organizations such as the Financial Stability Forum--where these exact issues you're raising are being looked at.

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

But what is your view of the exposure of Canadian banks as this deepens? This goes beyond what was initially thought to be the initial tranche of the subprime mortgage issue. This goes a lot deeper and broader. First of all, what is the exposure of the U.S. economy to this, in your opinion? What would be the exposure of Canadian financial institutions?

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Paul Jenkins]

I'm afraid I really can't answer that question. I'm loath to comment on individual financial institutions. I think what is important here is that we recognize the size of the losses that are taking place; that financial institutions, whether they're American or otherwise, in recognizing the size of these losses, recapitalize their balance sheets to strengthen them so they can continue to lend on a go-forward basis. So these are the issues that I think are particularly important, that are being looked at both domestically and internationally.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

Thank you, Mr. Jenkins and Mr. Murray, for coming in again. As you can tell, there's a lot of interest by members of this committee in monetary policy, interest rates, the dollar, and a lot of these issues. We would certainly appreciate having you back in the future. I think having more information rather than less is certainly helpful for this committee and all parliamentarians. Again, thank you very much for coming here today.

Members, we will suspend for two minutes, and then we will come back and address Ms. Nash's motion.

[The Chair, Conservative, James Rajotte]

We will start with the motion by Ms. Nash.

Ms. Nash, would you just read the motion and then provide a rationale to the committee for it?

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

Thank you very much, Mr. Chair.

The motion reads:

That the Standing Committee on Industry, Science and Technology recommend that the Minister of Industry, Jim Prentice, utilise his discretion under the Investment Canada Act to halt the proposed sale of MacDonald, Dettwiler and Associates Ltd. to Alliant Techsystems until such time that a full hearing into the sale is conducted by this Committee.

My rationale for this is that the minister has the ability to okay this sale under the Investment Canada Act. There are many questions that need to be raised about the sale, some of which perhaps the minister can answer, some of which perhaps others should be answering. They are questions related to the investment that Canada has made into the technology that's being sold. We've spent hundreds of millions of Canadian tax dollars in developing a RADARSAT technology.

There are questions about how this is going to be used. Will Canada get the access from this technology that it was intended to get under Bill C-25, passed by a previous government, concerning the operation of remote sensing space systems? There are questions about the company that this technology is being sold to or that the business is being sold to and what that means in terms of our compliance with international treaties, such as the land mine treaty. Are there other international conventions that may be affected by that? We've already been told by other members of this committee that the proceedings of the Investment Canada Act are confidential, for the most part, so we won't necessarily get answers to these questions. We'd like to know about the impact on employment. There are 1,900 employees in this company. What will it mean under ITAR? If this technology, if this process, comes under ITAR, will Canadians be able to work on this technology or will it in fact have to shift to the U.S.?

There are a number of concerns about the sale, the technology, the economic impact, and the time factor. The minister has 30 days once an application has been submitted. I understand the application for sale has been submitted. He may enact an extension, but we don't know if he's going to do that. I'd like to know why the need for a sale when this is technology that was designed primarily to provide surveillance of the land mass of Canada in the Arctic and surrounding maritime areas.

There are many questions that need to be answered. The fundamental rationale is that the minister could very quickly okay this deal and then it's too late for us to ask these questions. If we have concerns or if we believe it's not in the interests of Canadians, it's too late for us to act.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Nash.

We'll go now to Mr. Carrie, please.

[Colin Carrie, Conservative, Oshawa, ON]

The member mentioned that maybe we won't get answers to this. I would say we wouldn't, because we've had a similar motion in the past. I went over the rationale, the same arguments. I don't think it's necessary that I repeat them now. She's basically asking the minister to do something he can't do. It's illegal for him to do it. It's 45 days, and he could do a 30-day extension, if that's the case.

We have the minister coming before us and he's agreed to address these issues.

If the Liberals and Bloc want to give a message to the business community that they're okay with this motion, that's fine. I just want to let everyone know we will be voting against this motion.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrie.

I have Mr. McTeague.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Chair, my question is for the researchers.

If indeed the minister has a mandate to stop the proposed sale, as recommended in the motion by Ms. Nash, I'm wondering about a full study being undertaken and the time lines. With the time lines, the researchers are going to say that it's entirely up to the committee, but I suspect it will go well beyond the period of time the minister can stop, halt, freeze, at least temporarily, the proposed sale.

Is there a question of impingement here? Perhaps the researchers could give us some clarity here.

[Dan Shaw, Committee Researcher]

The minister has full discretion in approving or not approving this proposed merger, and he has timelines. I think Mr. Carrie has explained them. He could further ask the permission of the purchaser in this transaction for a further timeline, but the way this motion is laid out is vague in terms of how long a committee would take, and I do not know even if this would fit into the committee's agenda. That would have to be determined before it would fall within the guidelines of what the minister could say okay to or not.