Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 3 - Evidence - Meeting of December 6, 2007
OTTAWA, Thursday, December 6, 2007
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11 a.m. to examine and report upon the present state of the domestic and international financial system.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Good morning, ladies and gentlemen. Today, this committee, the Standing Senate Committee on Banking, Trade and Commerce, is privileged once again to have as its guests the Governor of the Bank of Canada and the deputy governor.
I will briefly introduce the members of the committee. I am Senator David Angus, from Quebec, the chair of the committee. Senator Goldstein, also from Quebec, is the deputy chair. Senator Meighen is from Ontario, and Quebec, Senator Tkachuk is from Saskatoon, Senator Gustafson, is also from Saskatchewan, Senator Segal is from Ontario, and Senator Ringuette is from New Brunswick. Today, we also have a guest at our committee — and I am very pleased to see her — the president of the Liberal Party of Canada, Senator Poulin, one of my very favourite senators.
[Translation]
We are very happy to welcome the Governor of the Bank of Canada, Mr. David Dodge, as well as the Senior Deputy Governor, Mr. Paul Jenkins. The governor is here to present to us his recent report on monetary policy and another very important matter.
[English]
This is a special session of the committee. We are not only present here but we are on the web — or, as my predecessor Senator Grafstein used to say, out there in ``webland,'' in every corner of the world. We are also on CPAC, which, I believe, if not live, will be aired very shortly.
It has been a privilege over the past seven years, governor, to have you attending at least twice a year at our committee. It is a tradition that does not go back that far. Senator Kirby indicated to me that it started during his chairmanship that the governor would come to the Standing Senate Committee on Banking, Trade and Commerce, as well as to the House of Commons Standing Committee on Finance. It has been a wonderful experience for us, particularly during your regime. I understand that seven years will come to an end on or about January 31, 2008.
Your period has been marked, as we can read on the front pages of the newspaper today, by remarkable management of our monetary policy in Canada. You kept inflation well within the bands, as agreed to between the bank and the government. Your appearances here at this committee have been particularly constructive for Canadians in helping not only we parliamentarians but the Canadian public to understand some of the complex elements of managing our economy through the monetary policy route and the other elements of your mandate at the Bank of Canada.
[Translation]
We are privileged to have been able to have these discussions with you on such important financial matters for the last seven years.
[English]
Perhaps it is apocryphal that even you, sir, could not get away with seven years without some real turbulence. We appear to be approaching, in some elements of the world, a perfect storm in the monetary and central bankers' world.
These issues are very complex. They involve, as you have told us, global imbalances, the differing effects of the softening U.S. dollar, the fact that Canada perhaps is bearing a greater brunt than other trading partners of this softening of the U.S. currency, and many other things, which I am sure you and Mr. Jenkins will share with us this morning.
It is a particularly sensitive time in the financial markets. With your usual candour and yet the discretion that finance ministers and central bankers understand so well — and we are gradually learning to avoid the big adjectives — governor, welcome again, and thank you to both of you for being here.
[Translation]
David A. Dodge, Governor of the Bank of Canada: First of all, Mr. Chair, I would like to congratulate you on your appointment as chair of this committee. You follow in the footsteps of distinguished people who have occupied the position.
[English]
The first time I attended this committee I think was in 1973, sitting in the back row somewhere way back there, when Mr. Turner was finance minister. I think Senator Hayden was the chair of the committee at that time.
I have to say that over these 35 years I have enjoyed very much the chance I have had to work with this committee. I worked with the committee very closely when Senator van Roggen was here and I was at the Institute for Research and Public Policy, IRPP, where we were working with him on this committee's report on free trade. That is probably what spurred a decade of debate on that issue, or at least was the first shot in the decade of debate on that issue.
I was here many times when I was at the Department of Finance, from 1984 to 1997, on a range of issues. The earlier ones were not very pleasant, as we were dealing with a banking crisis in this country, and you were worried about changes in the legislation governing financial institutions and setting up the office of the superintendent. I was here many times as we were working through what seemed a never-ending series of tax bills over that period, then the FTA arrangement, and then more latterly at the Department of Finance as we were trying to deal with the debt and deficit situation in the 1990s.
It has been a very long and fruitful experience, and I have to say I have always been incredibly impressed with the quality of the work this committee has done and the quality of questions that were put to us over that time.
Over the last seven years, Mr. Jenkins and I have appreciated our semi-annual meetings with you. They have been incredibly valuable to us, and I hope that you on the committee have found them equally useful.
Today's meeting comes just a few hours after we published the latest edition of our Financial System Review — copies of which we will give to you. Obviously, you have not read it, since it only appeared about an hour ago. Nevertheless, it contains a lot of information on and analysis of issues that I know you will raise in the course of this discussion.
The purpose of these semi-annual meetings is really to discuss our Monetary Policy Report, and even though we are coming a little late this year, I do want to begin with that report, with the outlook as we saw it in October, and then talk about developments since that time and our current assessment of risks.
[Translation]
The bank's outlook from October is summarized in tables 1 to 3 of the Monetary Policy Report. In October, we saw strong global economic growth continuing in 2008 and 2009, although we foresaw considerably weaker U.S. growth in 2008 than had previously been the case. The global outlook is summarized in table 1, which appears on page 25 of the French version of the report and on page 23 of the English version.
In Canada, we were looking for weaker economic growth in the fourth quarter of this year and the first half of 2008, but some strengthening thereafter. As you can see from table 2, on page 27 in the French version and page 26 in the English version, we were expecting continued strong final domestic demand throughout the projection period, but considerably weaker net exports.
This outlook reflected weaker U.S. growth and a stronger Canadian dollar, which was assumed to average $0.98 U.S. over the projection period. Inflation was expected to peak in the fourth quarter of this year before returning to the 2 per cent target around the middle of 2008, as you can see from table 3 on page 30 of the French version and page 29 of the English version.
Against this background, we left the target for the overnight rate unchanged at 4.5 per cent on October 16, and judged the risks to our outlook to be roughly balanced with perhaps a slight tilt to the downside.
[English]
Now let me turn to the development since October. The Canadian economy continues to operate above its production capacity. Given the strength of domestic demand and weak productivity growth, there continue to be upside risks to the bank's inflation projection.
However, senators, other developments since October suggest that the downside risks to the inflation projection contained in that report have increased. Difficulties in the global financial markets related to the valuation of structured products and anticipated losses on U.S. subprime mortgages have worsened since mid-October. These difficulties are expected to persist for a longer period of time than previously thought.
In these circumstances, bank funding costs have increased globally and here in Canada, and credit conditions have tightened further. There is an increased risk to the prospects for demand for Canadian exports, since the outlook for the U.S. economy, particularly the U.S. housing sector, has weakened since October.
All these factors considered, the bank judges that there has been a shift to the downside in the balance of risks around the projection we published in October for inflation through 2009. In light of this shift, the bank decided to lower the target for the overnight rate, at our fixed announcement date on Tuesday, to 4.25 per cent.
At our next interest rate decision in January, we will have to assess all economic and financial developments, including those that have already taken place and those that will take place over the next six or seven weeks, and the balance of risks, and have a full, updated projection for the economy and for inflation in our Monetary Policy Report update to be published on January 24.
Mr. Chairman, Mr. Jenkins and I would now be very happy to answer your questions.
The Chair: Thank you very much, Mr. Dodge. Before we start the questioning, I thank you particularly for those preliminary comments you made, both personally, with respect to the new occupant of this chair, but also generally, with respect to your comments about your experiences with our committee, which we reciprocate. It has been a wonderful relationship.
I had not quite appreciated, when I said a few words at the beginning, that you still have lots of action before you. There not only are the current problems, which you have now elaborated on, but there is another rate setting on, I believe, January 22, as well as the Monetary Policy Report update on January 24. These are major events.
Colleagues, without further ado, I think the governor and the senior deputy governor are ready to answer our questions.
Senator Tkachuk: Welcome, Governor Dodge. I am sorry to have to see you go. It has been a great seven years. I hope you will enjoy your semi-retirement, because I cannot believe that you are going to retire.
Governor, when senators, including myself, were concerned about the effect the low Canadian dollar was having on our productivity, making it look highly but, to my mind, artificially competitive, we have always been told by you and previous governors of the bank — and maybe we will be told the same by your successor, Mr. Carney — that commodity prices had a lot to do with why the dollar was so low. Now we hear that the reason for the high Canadian dollar is the decline of the U.S. dollar. Which is it? Are commodity prices to blame, or is it the declining U.S. dollar, or is it both?
Mr. Dodge: The short answer is that both factors operate.
Senator, the Canadian dollar bottomed out in 2003, when it was down around 62-odd cents American. What has happened since then is that our terms of trade have improved enormously, roughly 25 per cent, from trough to peak. The terms, of course, had declined over the previous seven years quite dramatically, following the collapse in Asia in 1997. We had added depreciation of the Canadian dollar over that seven-year period, which also reflected the decline in terms of trade.
The appreciation or the improvement in our terms of trade over the period since 2002 has been quite dramatic, resulting in a major influence on the Canadian dollar. The Canadian dollar is influenced by that, not by any means exclusively, but clearly that is a key underlying influence.
Indeed, movements in the Canadian dollar reflecting those events are very much part and parcel of the adjustment mechanism that allows us to keep inflation on track and, indeed, to ensure that we remain close to capacity, as close to capacity as is reasonable in this country.
At the same time, and particularly recently, we have had quite a sharp depreciation of the U.S. dollar on a trade- weighted basis — a depreciation against Europe, Australia and Canada, indeed, against a number of emerging-market countries. That also plays into the trend movement we have seen in the Canadian dollar over that period.
The short answer to your question, as I said at the outset, is both. However, the main influence — and certainly the main trend influence over this period — has been the appreciation in our terms of trade.
Senator Tkachuk: What do you mean by ``terms of trade''?
Paul Jenkins, Senior Deputy Governor, Bank of Canada: The chart on the terms of trade is shown at page 16 of the Monetary Policy Report.
Senator Tkachuk: Do you do this to confuse us?
Mr. Jenkins: No.
Senator Tkachuk: There are always new terms coming up. I have never heard that term before.
Mr. Jenkins: This is to give a visual sense of how much the terms of trade have increased. As the governor indicated, from late 2001, or 2002, the terms of trade have moved up quite significantly.
The terms of trade is the ratio of the price that we receive for the goods that we sell internationally relative to the price of goods that we purchase internationally. This movement indeed is very much related to the movement in commodity prices.
You then go through the thought experiment. Commodity prices have been rising quite dramatically, largely because of the strength of demand in the world economy — think China — and we sell commodities, energy and non- energy. The prices of those exports have been rising quite dramatically. At the same time, the prices of many of the imports that we have been purchasing have been declining. Part of that reflects the decline in goods that China has been selling; part of it reflects the fact that we do import quite a bit of machinery and equipment and there has been a trend decline in that.
You have two prices going in opposite directions. The terms of trade shows the ratio of that. It is very much a reflection of the fact that we are earning a lot of income in Canada because the prices of the products we sell internationally have been rising.
Senator Tkachuk: But that is good, is it not?
Mr. Jenkins: That is good, yes.
Senator Tkachuk: In my part of the country, out West, we do not hear complaints about the fact that the dollar is higher. Our input costs on agriculture are cheaper, our gas is cheaper and our fertilizer is cheaper. Our machinery is not yet as cheap as I would like it to be, but it is at least falling. Our half-ton trucks are cheaper. This is very helpful to us.
I am a little concerned that we followed quickly, when the U.S. dropped their interest rate, to drop ours concurrently so that our dollar dropped to about 98 cents — I do not know what it is today. Will we be following them again?
Mr. Dodge: First, senator, let us be very careful with what is going on here.
What we just described were the kind of trend movements. As we said in this report, we thought that over the period going forward — providing that we use the forward price for oil, which was around U.S. $80 a barrel; and we take the index of all of our commodities — that would probably still remain high. We said that we would operate on the assumption that, over a period, a dollar around 98 cents was probably broadly consistent with the underlying factors that we saw here in the Canadian economy. Those underlying factors might change, but at least as we projected them. The figure of 98 cents sounds very specific. I do not intend it to be that specific, but something in the mid-to-upper 90s seems to be consistent with that.
Since that time, of course, we have had some turbulence in financial markets, and extreme volatility not only in interest rates, and so on, but also in exchange markets. That spike that we saw, which got us up to around $1.10 US, quickly came off. We have recently been trading roughly in the range that we thought made sense against the outlook that we had laid out in the report.
You need to separate clearly the kind of trend movements that you can see make sense against what is going on in commodity prices, productivity, and so on, here in Canada, and those movements that represent the turbulence in markets that have largely since then been corrected.
We can expect further turbulence. That does not make life easy for anyone, in particular for exporters, but you have to look through that to the underlying factors that are there.
Senator Tkachuk: There has been a lot of concern and a lot written in the financial papers about productivity in Canada. I always thought that the banks' deliberate effort — I do not know if it was or it was not — to have the dollar at such a low level, for whatever reason, would have the long-term effect of affecting productivity. I am wondering if the bank feels partly responsible for our productivity problems, because our exporters have gotten used to a low dollar, which is really just another form of subsidy.
Do you take any responsibility for that at all, or none whatsoever?
Mr. Dodge: Well, responsibility on productivity, I think, is widely shared in the economy. We all have a responsibility for that. Let us consider what was going on — and let us break it into two periods — from 1996 through to 2002 and then 2003 onwards.
In that earlier period, we had a collapse in world demand for many of the things that we export, whether it was metals, energy, or whatever, largely stemming from the very marked slowdown in growth and demand in Asia. That meant that, broadly speaking, the resource industries in this country — that is, people, financial capital, and so on — were releasing those resources. In some sense, the decline in the dollar, which made employment and manufacturing more attractive, crowded employment and manufacturing, whereas the employment had been reduced in the resource sector.
There was a shift of real resources from the resource sector to the manufacturing sector. That was absolutely appropriate, and it allows us to maintain not stellar but reasonable levels of employment in this country over that period.
Since then, we have had exactly the opposite happen. We have had an improvement in the markets for resources and, as reflected in the terms of trade, the terms of trade have turned against manufacturers. It is absolutely appropriate that, over this period, we are releasing resources from the manufacturing sector so that they can be more profitably and better employed — and I mean profit from the point of view of the value of the output of individuals and the value of output of firms — in other parts of the economy. That is, indeed, entirely appropriate.
As a result, initially you found that there was downward pressure on productivity in the manufacturing sector, as you would expect, because we were encouraging it. In a sense, the price system was encouraging manufacturers to hire more labour, and that was appropriate. At the moment, the price system is encouraging those same people to shed labour.
It does take time to make adjustments. At least part of the recent rather poor productivity performance in the manufacturing sector, or in the non-resource sector of the economy, is due to the fact that we are going through this period of making adjustments. We are having to make new investment and we are having to shed labour. During a period of adjustment, we know from historical experience, that is negative for productivity.
If you go to the resource sector, exactly the opposite factors are at work. Anyone running a mine knows that during periods of high prices you low-grade, which means that labour productivity in the resource sector during periods of high prices actually appears to decline, but that is again the natural working.
I do not want those remarks to indicate in any way a lack of concern for productivity. We all have to be highly concerned about our productivity performance. I am saying here that the normal operation of the economy in moving real resources, people, machinery and so on around between sectors does have a negative impact on productivity. The long-run impact certainly for productivity in the non-resource sector will be actually to increase it, but you do go through this period.
Finally, just let me add one word of caution. The hardest thing for statisticians to measure is productivity. One always has to be cautious about the numbers. They are a division of two numbers. If you move those numbers just a little bit as revisions come in, the actual calculated productivity number can move a lot.
Senator Tkachuk: Our manufacturers should have no problem then.
Mr. Dodge: Adjustment is always difficult.
The Chair: Senators, we know that the questions can be long, as well as the answers. I will ask both sides to be short. I let Senator Tkachuk's questioning go on, not only because he was the first on the list but because he was so patient yesterday when the Minister of Finance was here, and because the list was very short. Now the list is very long. I would urge everyone to keep that in mind.
Senator Ringuette: I should like to say that I was happy about the lowering of the interest rate from 4.5 to 4.25. That should help the current state of our economy and dollar.
We have a close trading relationship with the Americans. Because of the high trade deficit the U.S. is experiencing, particularly with China — because of China's inflexibility in its monetary policy, and because China has invested so much in the U.S. operating budget — I cannot help but wonder, and I want you to correct me if I am wrong, to what extent the lower U.S. dollar is self-inflicted, in order to try to better control their trade deficit and the debt that they have toward China. We are innocent but still are affected by the U.S. monetary policy, which at the end of the day is protectionism at its most complex.
Mr. Dodge: Senator, that is an extraordinarily good question. I will try to be brief, and in brevity undoubtedly will not be totally satisfactory in the answer.
As I said to Senator Tkachuk in response to his question, if you look at what has been driving the Canada-U.S. exchange rate, from our side it has been the improvement in terms of trade, so we would have expected quite a bit. However, as you quite correctly point out, the U.S. has been running a very large deficit with the rest of the world. The U.S. has been the consumer of last resort for the world. The rest of the world, but in particular Asia — and I do not want to focus here only on China; let us take Asia writ large — has been generating excess savings over this period and investing them in U.S. dollars. Those are the global imbalances we have talked about now for at least two and a half years at this committee.
The depreciation of the U.S. dollar is one element of correction of those imbalances. Were that depreciation to be occurring more broadly and not just against floating rate currencies such as the Canadian dollar, the Australian dollar, the euro, the Brazilian real, or whatever, that is absolutely appropriate and is part of the adjustment mechanism — not all, but part of the adjustment mechanism — that is going on.
At the same time, we really do need to see Asia increase its domestic demand, in particular its household demand for its products. Mr. Flaherty and I have raised this issue at the IMF. We just came back from South Africa where we raised it in the G20. It is an issue raised by many countries, including the Europeans, the South Africans, the Australians and so on.
The longer the Asian countries resist using, at least in part, currency appreciation against the U.S. dollar, it is absolutely true, as you said, senator, that more of the adjustment then falls on the floating rate currencies. We are probably taking a little bit more of the adjustment than is appropriate. However, the adjustment itself with the United States is absolutely appropriate, and it is also very important that the Asian countries — in particular China but including Japan and a number of other Asian countries, although not India in this case and leaving India aside — do more to encourage domestic demand as part of the adjustment process.
Senator Ringuette: I recognize that. I have a short follow-up question. We will look at Asia as a whole. Given that the relative wealth of its consumers is very narrow, a very slim margin of its population, how can that be encouraged? You have a big shift in regard to well-being concentrated in a very small number of its population.
Mr. Dodge: This is obviously for the Chinese authorities to deal with, and, indeed, if you look at the authorities' intent, their intent is in the right direction. Obviously, they do not have a social security system, a health system or a public education system, so lacking these three fundamental underpinnings — which we are used to in our supposedly highly capitalist environment, as basic underpinnings — it is not surprising that Chinese households, and to a lesser extent other Asian households, engage in a lot of precautionary savings. Building these social infrastructures is extraordinarily important. The Chinese recognize that. One might say that their budgets do not yet totally reflect that recognition.
Senator Meighen: I want to take you back, perhaps somewhat tangentially, to what Senator Tkachuk was raising, the question of productivity and prices. This committee is engaged in a study on interprovincial trade barriers. The one striking feature of the evidence we have heard so far is that those who come before us are either at one extreme or the other. One side says it is really not a serious problem at all, that it is a natural reflection of our federation and that we should not get so fussed about it.
The other side takes a different view, including the Minister of Finance, who was before us yesterday, and says it is a serious problem and points out areas of concern that I would think would fall under your jurisdiction of productivity and prices and whatnot.
Could I get some expression of opinion from you as to the effect of interprovincial trade barriers on that sector, and you can keep it to productivity if you would prefer.
Mr. Dodge: I will try to be brief, and then I want Mr. Jenkins to comment on this one as well.
In periods of adjustment, adjustment is always difficult, moving real resources and people from one industry to another, from one employment to another, from one firm to another, and in particular when that adjustment has to occur interprovincially or inter-regionally. Any barriers that are there make it more difficult for people to move and take their skills from one province to another. Any barriers frustrate that adjustment process and make that adjustment process much more difficult.
That is particularly important at this period of time or in periods of time when you are getting big terms of trade exchanges, between industries within Canada and between regions within Canada.
It is at this period of time when those barriers, in fact, create the greatest problem because they make adjustment more difficult. I am not going to put a number on it, but it is important to think about this in a dynamic sense and not just in, if you will, a status quo sense.
Mr. Jenkins has worked a lot on this issue.
Mr. Jenkins: Picking up on those comments, senator, this is an important issue for the reasons Governor Dodge has touched on, that you just have to think back over the last 10 to 15 years to what an economist would call the ``economic shocks'' we have had to deal with this in country. Go back to the Asian crisis, which we mentioned earlier, the collapse of the high-tech bubble, and more recently, the increase in commodity prices. These shocks will continue, so the issue is how adaptable you are as an economy.
This issue of flexibility is important. That is what will enable the economy to stay at full employment as opposed to having to go through a much more protracted adjustment. When you have these sorts of relative price movements, as we call it, whether it is commodity prices, exchange rates, those types of economic shocks that you have to adapt to, the question is how you best adapt to them. The issue of flexibility and mobility of resources across the country is important. The more flexible your economy, the higher you can sustain output and employment on an ongoing or, as the governor said, a dynamic basis.
These are important from that perspective. The agreement between Alberta and British Columbia is an example of what can be done to improve the flexibility and adaptability of the Canadian economy.
Senator Meighen: Following along the same line of barriers to productivity and efficiency, Canada, as you know is an anomaly in terms of having a multi-level regulation of securities markets. Again, the Minister of Finance made it clear he favours a common regulator; others favour a single regulator.
Define it as you will, to what extent is Canada penalizing itself by having a multi-level securities regulator?
Mr. Dodge: First, we have tried to do a fair bit of work on this. I would be very hard put to give you a single number of what the cost of that penalty is.
Second, it is very important to concentrate not just on the form but also on the substance of that regulation. What is important is that we have regulation that applies the basic principles of good securities regulation that makes the markets function and apply those basic principles in a way that is reasonably flexible — rather than having a myriad of detailed rules that small companies, as well as large, have to work through — and then, much as the FSA does in the U.K. with some basic principles, applies those through guidelines quite differently for a Royal Bank and an ABC junior mines.
That degree of flexibility is extraordinarily important.
You do not want to overburden the system with regulation, but you do want the basic principles to apply to everyone. Much of the debate ought to be focused on how it is that we will do that rather than only whether you should have one or a multitude of bodies.
The second issue that is incredibly important, and we have spoken about it before, senator, is that the basic rules be enforced and be seen to be enforced so that everyone can have confidence in the system. Part of our problem at the moment with division of labour that goes across a number of securities commissions, a number of provincial Attorneys General, the federal Minister of Justice and the various police forces in the country is that it is not conducive to effective enforcement.
Finally, of course, if you go back six or seven years now, we were working with the securities commissions themselves. They were working hard to try to get to what was called Universal Securities Law — USL — that would be consistent across everyone. That has not quite finished.
Regardless of the form of the organization that you end with, and it is appropriate that various parts of the country might specialize in parts of the securities regulation, it is important that it all be, in a sense, tied together and that it be tied together with the enforcement system and that there be tight coordination. That is what we have talked about at the bank as opposed to a particular form or other of what a commission structure might look at.
We know there is some real expertise in dealing with regulation of junior mines or resources. There is real expertise concentrated in the city of Calgary and the city of Vancouver. You want to draw on that. There is real expertise in dealing with financial industry in the city of Toronto. There is real expertise in dealing with derivative products and some of the more highly structured products in the city of Montreal, so you would want to ensure you draw on those strengths, however you formulate it.
The final point that I would make touches on what we will discuss a little later, Mr. Chair, which is that we have one very peculiar aspect to securities regulation — and it is not only true in Canada, although it is probably true to a slighter degree in Canada than elsewhere — that is, that we regulate the hell out of securities that are designed or at least could be aimed at being sold to individuals or, if you will, less sophisticated investors.
Then we have this so-called exempt market where securities regulators stand together. There is not even a basic principle underlying securities destined for that exempt market, where investors are supposedly sophisticated, nor a principle of giving information about securities being sold. That seems highly anomalous.
Going forward, regardless of the form of securities commission, we will have to think very hard about whether there should be some basic principle governing the amount of disclosure in securities destined for that exempt market?
Senator Harb: Two days ago, the Bank of Canada reduced the interest rate; the next day, the Bank of England reduced its interest rate. Probably today or tomorrow, another bank somewhere in Europe will do the same. One might think there is communication taking place between the different banks, which makes sense if you really want to manage the global situation properly.
You talked about, since October, the upside risk to the bank's inflation projection and the downside risk projection to the bank. At the end, you said that, considering all of the different factors taking place, you believe the risk is downward. Therefore, are you indicating that it makes sense for us to reduce the interest rate?
As a sceptic, I would say that this is, in essence, an overall excuse by the different banks to do so and that the real reason is what is taking place in the market in terms of the difficulties and the challenges facing the financial market now. You alluded to that when you talked about the risk.
We seem to be getting information in small doses every day. One financial institution will say it lost $4 billion one day, and the next day another financial institution will talk about losses in the amount of $3 billion, et cetera. Members of this committee, and I am sure many of the public, would like to know how bad the situation is. How much do you know about how bad it is and when will the public know how bad it is?
Mr. Dodge: That is difficult question to answer. Therefore, I will answer it in pieces.
There are some things that we know are going on that is quite appropriate. Other things are happening because of uncertainty. Those need to be separated out.
What is appropriate is that we are seeing a re-pricing of risk in markets. Since the fall of 2004, we have been saying that we thought credit spreads were getting very narrow and were not appropriately reflecting risk. It is not just us at the Bank of Canada that have been saying that; it has been a common theme across central banks. At our meetings every two months in Basel, Switzerland, that issue has been discussed as a source of worry. Last spring, when those spreads started to widen, we thought that was a good thing. Some widening of these spreads to better reflect the underlying risks is entirely appropriate.
However, that process of widening out is messy and you are never sure how it will operate.
Why is it particularly messy this time? It is messy because around the world, over the course of this decade, driven by the financial markets of London and New York, there has been the development of highly structured asset-backed securities, where the ability of an investor to understand the underlying assets has gone down as the structures have become more complicated. We have not had a basic rule to the effect, for example, that credit rating agencies can only rate products on information that is publicly available.
Last summer, nobody knew what the quality of these assets was. In Canada, it was with respect to non-bank asset- backed commercial paper. We have seen it in the U.S. and the U.K. with respect to SIVs, structured investment vehicles. It was also the case there with respect to asset-backed commercial paper. We have also seen it there with respect to mortgage-backed securities.
Beyond that, globally, the banks had relationships to provide liquidity — agreements of one sort or another to take these assets back on to their books. None of that information was very clear.
Finally, in principle, we have moved to a point where the financial holdings of banks or the holdings of any company are supposed to be, so-called mark to market. For many of these securities, there is not a market, full stop. Some of them are traded over the counter, but some not at all.
The situation is complex and non-transparent. While I have tremendous respect for people like Jerry Corrigan in this regard, I just do not accept the protestations that everyone really knew what they were buying; they did not. That they did not know what they were buying is not a reflection that they did not do their work but rather a reflection that even if they wanted to do their work they could not dig through this.
Now we have a problem that financial institutions have to mark all these assets to market where there is no market. They have to assume values for this stuff that you cannot get from the immediate marketplace. If you were to take it from the marketplace, those values would be fire-sale values far below any long-term value.
The real difficulty now is how to turn this stuff out. There are underlying losses, but the magnitude of those losses is difficult to determine.
It is clear that, in the long haul, the cash flow that will come from such a sale would not justify the fire-sale price at which it is trading. Until we dig through all this and it becomes clear that this is a clear argument for greater transparency in all markets, there will be great uncertainty.
Recognizing that we have a major problem from which to dig ourselves out, of $30 billion of non-bank asset-backed commercial paper, I would say that, from what we know — and we know quite a bit — the Canadian banking system is pretty healthy. I think by and large you can place reasonably high reliance on the reports that are coming out of the Canadian banking system.
We will see, in reference to some of the foreign banks, how that all works out as they come up to their year-end. Our banks have had their year-end, but the foreign banks are coming up to theirs.
[Translation]
Senator Biron: My question follows on somewhat from Senator Harb's. Yesterday, the United States Department of the Treasury announced that it was freezing the rate on risk loans for five years. This measure should help the crisis in commercial paper.
The stock market valuation of banks in Canada has noticeably dropped in recent weeks, largely due to the crisis in commercial paper. Could this crisis bring about another crisis in the hedge fund market, and have a domino effect on the Canadian and world economies?
Mr. Dodge: The financial situation around the world certainly has an effect on the world economy. The cost of credit for business and for households will rise. There will therefore be a tightening of credit. This tightening will not necessarily be appropriate, because, at the moment, it results from uncertainty at the present lack of transparency.
In Canada, there is a problem with the paper that is presently frozen. Investors and issuers are holding discussions in Montreal at the moment. But I must emphasize that the assets behind this paper are not Canadian assets. For the most part, they are American. So the effect of the freeze here is quite different that in the United States. In the United States, the effects are real. The housing sector is suffering, and as a direct result of the problem with the paper.
So it is important to come to a resolution, or at least to work out the framework for a resolution, in Montreal on September 14. The implications are different for Canada, for the United States and for Europe.
[English]
Senator Moore: Thank you, gentlemen, for being here.
In the summary of your Monetary Policy Report, talking about inflation projection you said that, on the upside, excess demand on the Canadian economy could persist longer than projected. This could come from two sources — higher growth and household spending.
With higher growth and household spending, what is the projection with regard to household debt, credit card debt and rate of savings?
Mr. Dodge: We go through that in the first chapter of the Financial System Review. It is quite clear that two things have happened since our last review six months ago. The demand by households for credit has continued to increase, having moved up from 10 per cent to 12 per cent. The ratio of household debt to household income continues to grow. It is high, but the ratio of household debt service to income, which has increased quite significantly in the last two years, is still at a level that one might say is quite comfortable. Certainly, it is significantly below the levels we experienced in the early 1990s and is way below what we went through in 1981-82.
I would say that we are still reasonably comfortable with those averages. The real question is what the tails of that distribution look like. Do we have some households that are at real risk? We try to go through that analysis. In doing that, we suffer from a lack of highly detailed data. However, I do not think we are yet in a position where we must sound an alarm.
Mr. Jenkins: As the governor mentioned, in the Financial System Review we go through some of these balance sheet issues that you just raised.
Senator Moore: I will take a look at that.
What about the savings part, Governor Dodge? Are we saving more or less; are we spending about the same?
Mr. Dodge: We measure savings rate by subtracting current consumption from current income, with the remainder accounted for as savings. The savings rate is still very low.
Senator Moore: Can you attach a figure to these items, or a percentage? When you say it is low, what does that mean?
Mr. Dodge: It is low by historic standards.
Mr. Jenkins: Using the national accounts data that Statistics Canada publishes, if you take income flow against spending, savings rates are running at about 1.5 per cent.
As Governor Dodge alluded to, when you look at the entire balance sheet of the household sector, that is, assets acquired — which includes housing and other real assets, as well as financial assets — and measure that against liabilities taken on to support those assets, you see the net real worth of the household sector, and it has been rising, on average, at a rate of 5 per cent over the last five to 10 years.
We can give you those calculations, if you would like. That represents the shortcoming of this calculation on the savings rate and illustrates why you really need to look at the whole balance sheet.
Senator Moore: Thank you for that.
I want to touch on a matter that has been raised by colleagues. In your report, you talk about the financial markets and greater-than-expected losses related to U.S. subprime mortgages. Did Freddie Mac and Fannie Mae not recently do large security issues of $5 billion each?
Mr. Dodge: I do not recall the exact number, but absolutely, they have to bolster their capital.
Mr. Jenkins: They have cut dividends.
Senator Moore: You say this led to global uncertainty about the valuation of structure products, which are these non-bank asset-backed commercial papers.
I looked at the reportings just recently. This deals with our chartered banks. On November 19, The Globe and Mail did a summary of this, which I thought was useful. Keep in mind that we had the banks before us in June. They said, ``There is no problem. There are all kinds of hedge fund operators, 7,500 in the world, and we only deal with about 100, but we do due diligence and have invested in all this stuff. There is no problem.''
Within a month or so after that, I think you will recall, Mr. Chair, I forget which company was before us, but it was a big financial loss.
On November 19, to go back to The Globe and Mail summary, they mentioned the Bank of Montreal, $320 million — a hit announced for that quarter. Royal Bank, $360 million, Bank of Nova Scotia, $190 million, CIBC $463 million. That is $1.3 billion, and then the next day, National Bank of Canada, $575 million, which is almost $2 billion announced for that quarter.
You mentioned, Mr. Doge, that there is $30 billion frozen. Is that $30 billion in these non-bank papers? Is it Canadian exposure only to these products?
Mr. Dodge: Canadians' exposure, yes.
Senator Moore: I mean in Canada.
The Chair: Just to clarify, I do not think we are talking only asset-backed commercial paper. Are we talking structured products generally?
Mr. Dodge: The nominal value of the non-bank asset-backed commercial paper that is out there was close to $40 billion, of which some is kind of old-fashioned plain vanilla stuff, but most of it is highly structured. There is something more than $30 billion in these highly structured conduits under discussion in Montreal.
The Chair: Are they levered as well?
Mr. Dodge: Some of them involve significant degrees of leverage.
Senator Moore: As I remember, when you were before us in May, you were cautioning us about these high-leverage instruments and that credit not being managed perhaps as well as it should be.
We have an idea of the quantity, but that does not tell us whether our banks have invested in these types of products from other countries, does it? That is what we know.
Mr. Dodge: No, no.
Senator Moore: Is that correct?
Mr. Dodge: Let us break this down here. What you said is absolutely correct. We try to go through this — where does this start? It starts at the bottom of page 13 in the document entitled Financial System Review.
First of all, you raised the following question: Are Canadian banks' risk-management practices up to snuff, or have they somehow fallen down?
Even in good risk management, you are going to make mistakes from time to time, and so the fact that you have one thing or two things that go wrong is not necessarily a slam. You would expect something to go wrong eventually; otherwise, there is no risk in the system at all.
The concern of the Superintendent of Financial Institutions is, generally speaking, are there adequate risk- management practices in place? Are boards supervising those risk-management practices of management? Things are never perfect, but generally speaking one would say that their risk-management practices have been reasonably good.
The second issue is this: Does that mean they do not hold any of these foreign assets themselves? The answer is no. They do hold some. They are taking markdowns on that, just as they would take markdowns on commercial loans that go bad.
The third issue is a bit trickier. This is why we see right around the world that there has been some freezing up of the interbank market and so on.
Senator Moore: You mentioned that. For the benefit of us and the public, when you say frozen up, what do you mean by that?
Mr. Dodge: The banks are no longer willing to lend to each other. Normally, banks around the world are financing themselves day in and day out by borrowing from other banks that have surplus funds and lending their surplus funds out. That goes on day in and day out. It goes on here as well, although our banks rely considerably less on the interbank market than many money-centred banks, such as New York and London and so on.
Senator Moore: What does the freezing up of lending between banks have to do with these non-bank asset-backed commercial papers?
Mr. Dodge: The question is, because it is not very transparent, what is being held? People have a fear that their counterparties to the transaction may be overexposed. They do not know, but there is a fear. It is clear that what we call the counterparty risk has gone up quite a bit. This is not just the risk of bank counterparties, but in respect of these structured products, there are other people in the business on whom risk is being laid.
The ones you will have noticed in the press are the bond insurers, the so-called mono-line insurers, who are in the business of providing insurance against default of the triple-A part of tranches of these highly structured securities. They have provided a lot of that insurance, and there are worries that maybe some of them do not have enough capital to be able to pay off.
Senator Moore: They will not give them money, so everything is seized up?
Mr. Dodge: Right. Because of the lack of transparency, it is very hard to sort through this.
Senator, if I could just make one more clarifying point. Think back to the last huge housing crisis in the United States — today, we call it a subprime crisis; back then we called it an S&L crisis.
Senator Moore: When was that, sir?
Mr. Dodge: That was 1990-91. That was a crisis or a problem in the U.S. mortgage market of more or less the same degree of depth that we are facing in that market today, but it did not lead to all other markets freezing up around the world because we knew where the problems were. The problems were in the savings and loan banks and institutions, and the American authorities could put their arms around that and deal with it. You will recall they then set up the Resolution Trust Corporation and slowly dealt with that over a period of time so that what looked like maybe a $300 billion or $400 billion set of losses ended up being a $100 billion loss. I do not have precise numbers for that.
Senator Moore: They managed and took control of it.
Mr. Dodge: You cannot do that today because it is dispersed all over. All the securities are mixed up with one another. It is a much more complex problem to deal with. To use vulgar words, it has kind of infected all sorts of markets in which, in reality, there is not a real credit risk problem. Therefore, it is going to be difficult to unwind, and it makes it very difficult for the U.S. government, for the treasury, to deal with it in the same way as they dealt with it before because last time around these loans were still on the books of now bankrupt savings and loans. If you went in and you took over that savings and loan and put it under administration, you could deal with the guy who actually owned the house, right?
Senator Moore: Exactly.
Mr. Dodge: Now it is all spread out. You cannot deal with it in that way.
Mr. Paulson has a much more complex and difficult problem to deal with. The U.S. Congress has a much more difficult problem to deal with.
Senator Moore: This gets back to talking about mark to market. Our banks have dealt in securities that are not marked to market as it turns out.
Mr. Dodge: Well, they have put a mark on those assets, which is their and their accountants' best judgment at this point time. Those marks may actually be too low; they may be too high — we just do not know.
The Chair: Governor, I am assuming there will be a little flexibility at 12:30?
Mr. Dodge: Sure.
The Chair: Senator Segal, you have been very patient so feel comfortable in your question.
Senator Segal: Thank you, chair. I was delighted that the governor began by referencing his early days with the Institute for Research on Public Policy serving Senator Van Roggen in an earlier version of this committee, which you will recall was ahead of its time in recommending free trade.
The governor will recall that the same IRPP a few years ago issued a paper done by Tom Courchene, a very distinguished economist from Saskatchewan at Queen's University, who talked about the need for us, with respect to the other area of the bank's mandate — which is moderating the up-and-down pressures on our currency — to consider, as our European friends have, a broader currency zone than the one that we now have.
My recollection of the response of the governor at that time was never ever would we be looking at a common currency zone for North America. Laterally — I found this quite encouraging — I think his response to a similar question put a couple years ago was ``not in the foreseeable future,'' which for me constitutes huge movement from the point of view of this governor's perspective on the matter.
I ask the question, though, in this context: We have seen the growth of the euro as a currency of reference for good and substantial reason to the credit of the European Central Bank. We have seen the American currency under pressure for a host of reasons, some of which Senator Ringuette referenced. Others reasons have been referenced today.
Clearly, the fact that the U.S. currency has to accommodate the purchase of large amounts of energy from other countries, including Canada, is another source of pressure on it. We know that at a 62-cent dollar we have problems and that at a $1.07-cent dollar we have problems. The notion of some kind of currency arrangement, it strikes me from the point of view of manufacturers and exporters and retailers, becomes more interesting as we go through these gyrations, despite the best efforts of the bank to moderate the movements.
I wonder, as this is likely your last appearance before the committee before you move into what I am sure will not be a retirement but, I hope on behalf of the millions of Canadians you have served so well under governments of all affiliations over the years, just a pause in your private life, you might want to reflect a little bit on some of these policy directions, understanding that you have a primary duty to the Canadian currency and to its sovereignty and to seigniorage and all those other very important issues of our sovereignty.
Mr. Dodge: That is a pretty open-ended question, senator.
Let me go back, though, and reiterate that there are really two stable ways you can deal with currency. You can have a monetary union at one end of the spectrum; at the other end of the spectrum you have a currency floating. In between, you have a mess that can be stable for periods of time but then can become incredibly unstable.
To the monetary union, I said I do not think in the foreseeable future, largely because monetary unions follow economic unions and not vice versa, in the economic logic but not necessarily in the political logic — that is, you have to have markets that are functioning, not just capital markets across those borders, but all goods and services markets and in particular you have to have labour markets that function across the border. When you do not have that, then a currency union without, if you will, a single market for capital goods and labour is likely to have trouble. When I said I do not see it for the foreseeable future, I guess I just do not see us getting to that point where we have a unified economic market that would allow us to have a unified currency market or a monetary union. That is kind of how I come at it from basic principles. Your judgment on the ability to achieve unity on those other issues would tell you how long that foreseeable future actually is.
Let us go to what I think is the more immediate issue. We have experienced over the last six weeks exceptional, extraordinary — apply whatever adjective you want — gyrations in the market for the Canadian dollar. We have never experienced this sort of gyration before, where intra-day and intra-week we get movements of 3 per cent and 4 per cent in the value of the currency. That is obviously a market that, for at least a period of time, was not really functioning very well. We know all markets are prone to overshoots and undershoots. The market for oil, for anything, is prone to that. Historically, we worried about that at the Bank of Canada and we used to come into the market to try to mitigate these wilder swings.
By the late 1990s, it was not clear at all that we were really contributing all that much, and so we stopped doing it. Essentially, through until the last few weeks, one would have to say the currency markets worked pretty well. We will have to go back and analyze what happened over this period — the likes of which we have never seen before. We will have to go back and analyze what happened there.
Finally, you mentioned my good friend Tom Courchene. We have one instrument; we can have one target. Our target is to keep inflation between 1 per cent and 3 per cent. If you set up some sort of currency band into which you were given a second target, and if we have big movements in terms of trade that will push you to the bottom or the top of that band, if it pushes you to the bottom of the band we have to squeeze like hell to keep the dollar up in the band. That may be entirely inappropriate given economic conditions and domestic inflation. We might, in fact, in those circumstances be driving inflation well below zero.
If we were headed to the top of the band, then we have to supply liquidity like mad and we would drive inflation way up.
With one tool you cannot focus on two objectives. By and large, preserving the domestic value of our currency, for you and me and every other household in the country, we have agreed with the government that that is the key thing.
Senator Poulin: When the permanent member of this committee, Senator Fitzpatrick, invited me to replace him today, I had no idea I would have the honour of being one of the senators who could ask a few questions to the outgoing Governor of the Bank of Canada, whom I have known personally for so many years.
When you opened the meeting, chair, you reminded us that Governor Dodge is leaving on January 31. I wanted to take the opportunity, David, to tell you that Canada has been privileged to have you as a public servant. You have served this country extremely well, both on the domestic platform and on the international platform. You have brought confidence and information to Canadians, but above all, you have served Canadians in the country.
I have seen you with different hats. I have seen you as Deputy Minister of Finance; I have seen you as Deputy Minister of Health; I have seen you as Governor of the Bank of Canada; and I have seen you with your cap and your pipe every morning walking.
Three things have always struck everyone who knows you. The first is the balance with which you approach different challenges, the balance between the economic and the social issues that you brought to your files. Second is the fact that you take your work seriously and yourself much less seriously. Third, you really remind me of a good tennis player — and I am still wondering how you make everything look so easy.
I do have a general question, Governor Doge.
[Translation]
One of the things we have discussed today is very serious, and you have provided an enormous amount of information. This is the fact that, at the moment, the country is in a period of financial adjustment. If I understand your message correctly, we are going to have to make sure that there is enough flexibility first for resources to be relocated and then for interprovincial barriers to come down.
You also spoke about the dollar. If I understood the English correctly, you spoke of slightly unusual behaviour in the fluctuations of the Canadian dollar in the last six weeks. In your opinion, what will be the main concerns that your successor will face, and how will he be able to guarantee the successful and stable adjustment of the two dollars?
Mr. Dodge: Senator Poulin, thank you for your remarks. It has been a privilege to serve Canadians and several Canadian governments. It was almost always, I will not say always, a real pleasure to do so. It was extremely interesting, and I have very much appreciated the support from governments, from senators and from members of the House of Commons while I was a public servant and Governor of the Bank of Canada.
The major challenge at the moment is to restore confidence in our financial markets in Canada and around the world. It is a challenge in Canada, in our own markets, but Mr. Carney has an important role to play in providing advice internationally, whether it be in the Financial Stability Forum or the IMF. Up to now, we in Canada, the superintendent, the Department of Finance, and the Bank of Canada have likely managed our system in quite an exemplary way. So we can play a bigger role by comparison to the role Canada has in world markets.
So it is a very important task. Mr. Carney has university training and private sector experience that gives him the ability to become involved in this process of cleaning up financial markets. This is his first task. After that, it is always difficult to manage monetary policy, but he has a great team. I am absolutely confident that monetary policy will be well managed in the coming years.
[English]
Senator Goldstein: Let me add my congratulations to you for a stellar performance, and my gratitude for your extraordinary career and the extraordinary commitment that you have displayed for Canadians. We are all very grateful to you for that. We would like to hope that after a week and a half of private life you will decide that you want to come back to continue helping us.
I have many questions, but because of the time factor, I will limit myself to just two. First, Minister Flaherty indicated to us yesterday that Canada has absorbed a highly disproportionate effect of the de facto devaluation of the U.S. dollar. He put a figure on it, 33 per cent, in comparison to the European Union, with 10 times the population, that absorbed less. Asia absorbed still less and, indeed, some economies in Asia benefited.
In retrospect, was there anything that Canada could have done or should have done to minimize the adverse effects that we have been feeling and will continue to feel for some time from the devaluation of the U.S. dollar?
Mr. Dodge: The calculation that the minister put before you is exactly correct in the sense that if you take our share of U.S. trade, which is roughly 16 or 17 per cent — not very different from China or the European Union — and you look at the magnitude of the movement of the U.S. dollar vis-à-vis our currency, it is absolutely correct that about one third of the effective correction that is coming to the U.S. dollar has been borne here in Canada.
Those are the points we made very forcefully when we were together in South Africa at the G20. I think we should be very clear that at least some of that correction was entirely appropriate from a Canadian standpoint due to what we discussed at the start. We have had a big improvement in our terms of trade against the United States.
You want to be a little careful with any calculation. The calculation is absolutely correct, but it does not necessarily mean that we should only have done 17 per cent of the correction because we only represent 17 per cent of the U.S. trade.
Then you come to these two very interesting words, ``could'' versus ``should.'' If we leave aside the issue of the spike, which took us from $1 to $1.10 and back to $1 in the course of several weeks, then the answer is that more or less the move from, let us say, the mid 60-cent value to the mid 90-cent value accords to what was going on from a domestic perspective.
There has been a bit of an overshoot at the top; there may have been a bit of an undershoot at the bottom. It is not clear, leaving aside the awful experience with this spike, it is not clear that there was something we ``should'' have done.
Let us look at whether we ``could.'' It is absolutely true that we at the bank could have come in and dramatically reduced interest rates, kept our interest rates very much lower than what we did, but we would then have had inflation very much higher than what we have.
If you look at it from the real side, Canadian manufacturers would not be any better off. They would be paying higher wages and have higher domestic costs. They might have a dollar that is low but they would have higher domestic costs. While there was something we could have done, we should not really have done it because all it would have done was create a more expensive adjustment process than the process we are going through — which is undeniably difficult because of the rapidity of the changes of relative prices of what we produce and what other people produce.
Hence, the answer is that there was something we could have done but should not have.
That leaves aside the issue we will have to examine — that is, why it is that markets got ahead of themselves for that period of time.
Senator Goldstein: My second question has to do with a paper you annexed to the Financial System Review that we received this morning. It is a paper dealing with reforming the credit rating process. It is succinct, intelligible, even to lay people like me, and there are a number of recommendations that are made in the paper. One of them springs forward with greater emphasis, perhaps, than the others and that is the recommendation that competition in the credit rating industry be encouraged by clearly spelling out the criteria that agencies have to meet. This would be designated by a securities commission. The Securities and Exchange Commission, the SEC, did exactly that in June.
Would you consider it appropriate that either the bank or some other agency spell out the criteria at this time in order to enhance the emerging of other credit rating agencies so that we are not limited by two major agencies only?
Mr. Dodge: That I think is a difficult issue. It is the SEC that does this in the U.S., and these agencies, if they are any good and worth anything, are global agencies. This is really an issue, in some sense, in the two major financial markets of London and New York with regards to how they see the process. What we were trying to do in that article is to raise the spectrum of issues that are important.
Senators, I should add that the Department of Finance, the Office of the Superintendent of Bankruptcy and us have been sitting down with the agencies. Unless they clean up their act, they will go out of business, so they are very keen to clean up their own act and are working very hard on it.
When I say ``clean up their own act,'' I mean that their ratings are going to be valuable only to the extent people understand what the ratings really mean. They, and certainly we, feel they probably have not been quite as clear on that as they should have been in the past.
It is very important that there be a principle that all the information they use to issue a rating should be publicly available. That is the case in their traditional business of rating Bell Canada bonds or Canada Pacific Rail bonds or what have you. There is nothing in that that is not publicly available, except they provide a judgment on the management of the firm. However, all the numbers are publicly available. All the big, sophisticated investors can do their own homework.
The problem with these highly structured securities is that they had information that, by agreement, was not available to anyone else. A big chunk of the problem in the Montreal process has been to get those data and break down the confidentiality arrangements that were in place so the investors actually could understand what was underneath the assets they bought.
We still put a lot of blame on investors. If you do not know what you are buying, do not buy, or if you do buy it, do not be surprised if something goes wrong. The point is they could not have known. I think there are some issues, but, for the most part, I think there are great pressures of the marketplace. It is always true you should use the marketplace to do what it can. The marketplace is putting tremendous pressures on the credit rating agencies to do their own cleanup if they are to have any business going forward.
Senator Moore: Who are these confidential agreements not to make available to the public the information behind the assets between?
Mr. Dodge: The sponsors of the conduits will provide information to you.
Senator Moore: What does ``sponsors of conduits'' mean?
Mr. Dodge: Coventry is an example of that.
Senator Moore: They had an agreement with whom?
Mr. Dodge: DBRS did not permit disclosure, and I am saying that is wrong.
The Chair: Governor, as you move on to your well-earned retirement to the rocking chair and the slippers, no doubt you will be doing a little reflecting. I cannot resist asking, as you have already begun subliminally to reflect, whether there is anything that stands out in the context of living life over as being one thing you might not have done? There is always the benefit of hindsight.
Mr. Dodge: One always learns lessons from experience. There are probably three lessons relevant to this committee that I would draw from those 35 years.
First, not adjusting is not an option. We tried that in the 1970s and we paid for it. The adjustment would always be difficult but we prolonged the process and made it a much more difficult. We had higher rates of unemployment and greater degrees of boom and bust in our economy than we really needed to have. That is why I made the distinction between ``could'' and ``should'' in response to Senator Goldstein's question. It is difficult because, at any moment in time, the adjustment process can be painful in financial terms but it is only more painful if you try to avoid it.
Second, I have learned that it is very important that governments, and I emphasize the ``s,'' do not get themselves into a situation where very large fractions of their tax revenue go to simply servicing the public debt. No one wakes up in the morning and says, gee, Prime Minister, that was great debt servicing you did for us yesterday. Governments that have to do that quickly lose the ongoing confidence of the people. Keeping public debt to GDP ratios low does not mean never running deficits — I hasten to say that — but it does mean that we should aim to keep the ratio low, particularly in light of the fact that there are more people like you and I, Mr. Chair, who do not have much hair left, and that will be true to a greater extent in the 2020s and in the 2030s than it is today, so it is very important.
Third, we have learned, again very painfully, that maintaining people's confidence in the future value of money is important. The best thing that a central bank can do is operate to maintain that confidence, whether the precise model or details of the inflation targeting regime, which we evolved by 1990, are right. The bank and the government have to examine whether the precise details are right; However, the basic thrust is absolutely right, so Canadians can go about their daily lives with confidence that their savings will not be expropriated by inflation at some time in the future.
Those are my three lessons.
The Chair: That is an extremely thoughtful response to the question I almost decided not to ask. I am really glad I did ask.
Mr. Jenkins and Governor Dodge, it has been a tremendous experience working with both of you. Governor Dodge, we wish you a very happy retirement in whatever you choose to do. We wish you Godspeed and many, many thanks for all of your reflections.
When we read about consumer confidence in your reports, we now understand what it means. I think Canadians are confident in following your great leadership at the central bank. Congratulations and good luck.
Mr. Dodge: Thank you, senators. Thank you, all.
The committee adjourned.