Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 11 - Evidence - Meeting of March 12, 2008
OTTAWA, Wednesday, March 12, 2008
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:10 p.m. to study on issues dealing with interprovincial barriers to trade; and to examine the present state of the domestic and international financial system. Topic: the Farm Debt Mediation Act.
Senator W. David Angus (Chair) in the chair.
[English]
The Chair: Honourable senators, we had a brief discussion with some of you on the issue of going to Washington. We had a trip lined up last May, and at the last minute our whip, the Conservative whip, cancelled it because of our numbers and potential upcoming votes. We paid money to a hotel to secure our rooms, and that money was not refundable, but it was reusable. In other words, we have a credit with a hotel.
We have had an evolving and developing consensus in the committee that we cannot discard all the evidence we have heard on the hedge fund and state-of-the- economy issues. The idea is to go back to Washington as originally planned and have a final intensive two days with senior people so that we can put a bow on our study and come up with a report. I gather honourable senators all agree with that general plan.
We talked about going during the break week in April, but the beginning of the week is not a good time to access people, and the rest of the week, every committee and its brother, apparently, including the Standing Senate Committee on National Security and Defence, Agriculture and Forestry and one other committee will be there that week. The embassy is stretched right to the limit. Also, I have canvassed members of the committee individually and they are not all free for the whole week.
I suggest there will be a committee week the first week of June. There is all-party agreement in the Senate between the two leaders. The big problem is on our side because we are not allowed to go when the Senate is in session because of our numbers.
I asked our efficient clerk to prepare a pro forma budget by which we would not be in the face of the Standing Senate Committee on Internal Economy, Budgets and Administration but would be fair and reasonable given the nature of the study. I asked that it more or less mirror what was approved last year for the study and take into consideration that we have a $6,000 credit for the hotel. The grand total is $72,900. I have circulated the budget. I need a motion to adopt it.
Senator Moore: Will the hotel honour the credit?
The Chair: We will obtain an extension. It will expire May 31, but we can obtain an extension.
Senator Tkachuk: You are looking at the first week of June?
The Chair: Yes, I would like to leave the date flexible, rather than tell Internal Economy we will go that week, because there is also a window in May. Assuming there is no election, we want to go before the summer break.
Senator Moore: We want to finish the report.
Senator Tkachuk: Before June.
The Chair: Exactly: All in favour?
Hon. Senators: Agreed.
The Chair: Any contrary minded? It is carried unanimously. Thank you.
I now welcome our witnesses to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. My name is Senator Angus, from Montreal, Quebec. Our distinguished deputy chair, also from Montreal, Quebec is Senator Goldstein. We also have Senator David Tkachuk from Saskatchewan and Senator Eyton from Ontario, Toronto. To my immediate left is our distinguished clerk, Line Gravel. To her left is Mac Harb, from Ottawa district, Ontario; Senator Ringuette, from New Brunswick; Senator Moore from Halifax; and Senator Massicotte, a former director of the Bank of Canada.
I think you are aware we are televised on the CPAC network and also on the World Wide Web. Welcome to all our listeners and to everyone here today as we continue our study on internal barriers to trade in Canada.
This is our final hearing on the subject that we began studying as one of three round tables that were set up on November 23, 2004. One round table related to the demographic time bomb, one related to productivity, and the third related to internal trade barriers.
We are honoured today to have two senior representatives from Canada's central bank, the Bank of Canada, Paul Jenkins, Senior Deputy Governor, and John Murray, Deputy Governor.
It is largely due to influence of the governor, the deputy and other representatives of the Bank of Canada over the years that we should conduct these studies, particularly the one on productivity and the one on internal trade barriers. We understand the bank in its macro role, if I can use that expression, over and above managing monetary policy, is interested in the well-being of our economy, our rate of growth as an economy and inhibitions to that growth. We have had the view that the Bank of Canada was of the view that perhaps these internal trade barriers that exist in Canada, and have existed for many years, are inhibitors to the growth of Canada's economy, productivity and economic competitiveness. In like fashion, productivity generally has been lagging perhaps. We completed our study on that subject and more or less gave a heads-up.
When we received a mandate from the Senate to conduct this particular study on interprovincial trade barriers, the language was as follows:
That the Standing Senate Committee on Banking, Trade and Commerce be authorized to examine into and report on issues dealing with interprovincial barriers to trade, in particular:
the interprovincial trade barriers that exist;
the extent to which such interprovincial barriers are limiting the growth and profitability of the affected sectors as well as the ability of businesses in affected provinces, jointly and with relevant U.S. states, to form the economic regions that will enhance prosperity;
measures that could be taken by the federal and provincial governments to facilitate the elimination of such interprovincial trade barriers in order to enhance trade and develop a national economy, and strengthen Canada's economic union.
In that context, we have heard numerous witnesses from all sectors of the economy, including provincial government representatives, but also, as you can imagine, labour organizations, academics, think tanks, the CD Howe Institute and the like. We have heard a singular lack of unanimity. For that reason, we are particularly interested in bringing our current witnesses to the table to bring the study to a conclusion. I am sure that they see this subject from a macro-perspective. We want to issue a report that is constructive and reflective of the evidence we have heard.
Since the study began, there have been developments and encouraging signs. British Columbia has made a Trade, Investment and Labour Mobility Agreement, TILMA, deal with Alberta. The Council of the Provinces has the issue on the agenda on an ongoing basis and is focusing on the issue more than in the past. As well, Quebec and Ontario are having encouraging discussions.
Perhaps our little voice is being heard, and with the help of television coverage of this meeting and other media voices, the message will get out.
Mr. Jenkins, please proceed with the first presentation.
Paul Jenkins, Senior Deputy Governor, Bank of Canada: Thank you for the opportunity to appear today. As you noted, with me today is my long-standing colleague, John Murray, recently appointed Deputy Governor of the Bank of Canada.
The issue of internal trade barriers is critically important, and I am pleased, chair, that this committee is examining it. We have reviewed previous submissions to this committee, and you will see that our focus will be slightly different. Rather than address the details of any given restriction to internal trade, we will focus on how trade and impediments to internal trade affect the overall, as you put it, macro-performance of the Canadian economy.
In these remarks, I will address two important issues from that perspective: first, the need for flexibility in adjusting to economic shape; and second, the need for economic policies that promote flexibility in markets for goods, services, capital and labour.
Economic flexibility refers to the ability of an economy to adjust to changing circumstances. Changes in economic conditions often relate to movements in relative prices, which, in turn, send important signals to markets. A flexible economy is one that adjusts to these signals and returns to its production potential as quickly and with as little cost as possible. Over the past decade or so, economic expansion in Canada and around the world has been robust, despite a series of major shocks. These shocks include the 1997-98 financial crisis in Asia, which spread to Russia and Latin America; the worldwide collapse of the high-tech bubble; the 9/11 terrorist attacks in the United States; severe acute respiratory syndrome, SARS, and bovine spongiform encephalopathy, BSE; intensified competition from China and India; and, since 2003, a sharp increase in commodity prices and associated sharp increase in the external value of our currency.
More recently, of course, we have been faced with the fall-out of credit market turbulence associated with problems in the American subprime mortgage market and the increased use of structured financial products. It is important to note that all these shocks were international either in origin or in dimension.
Many of these shocks, notably, the Asian crisis and the recent sharp run-up in commodity prices, involved large movements in relative prices of energy and non-energy commodities, as well as large movements in the exchange rate for the Canadian dollar. These movements have triggered, in turn, important shifts in economic activity, as well as re- allocations of production resources across sectors and regions of the country.
All these changes underscore the fact that we live in an era of rapid change, and we operate in a global environment that is constantly shifting. Uncertainty, risks and shocks are constant features of the economic landscape. For Canada, it is particularly important that we recognize this reality, given how open our economy is to international trade and capital flows.
[Translation]
The best approach to dealing with risks and sudden developments is to constantly ask ourselves what steps we can take to make our economy and domestic markets more flexible, and thus better able to adapt to changing circumstances. And we need to recognize that this is a shared responsibility among firms, workers and policy makers.
Firms and their workers need to be able to respond quickly to technological advances and to shocks that require changes in the way they conduct business, the kinds of goods and services they produce, and the markets they choose to develop. A well-functioning market-based economy that sends clear relative price signals is critical in this context.
At the same time, policy-makers need to be wary of barriers to adjustment, such as labour regulations that inhibit the movement of workers from one type of job, or from one sector or region, to another. To enhance flexibility, to raise the growth potential of the economy, and to increase the resilience to shocks, we need policies that encourage structural reforms. For Canada, structural reform has a broad context, with priorities across a number of jurisdictions.
The financial system, with its vital role in supporting a healthy modern economy, has been and will continue to be one priority. An efficient and sound financial system enhances overall economic flexibility by helping to redirect capital and resources to the most productive uses, in a cost-effective way, following a shock.
Removing internal barriers to the free movement of goods, services, and labour is another priority. These barriers are rightly attracting attention in Canada as differences in regional economic performance and shortages of skilled labour are becoming more pronounced, and as demographic challenges intensify.
[English]
A number of initiatives to remove internal barriers have been undertaken over the years but with mixed and generally modest results. The Red Seal Program was introduced more than 45 years ago to help standardize and recognize workers' trade qualifications. The Agreement on Internal Trade, signed by first ministers in 1994, aimed to reduce barriers to the movement of goods, services, investment and labour. One important recent example that you cited, chair, is the Trade, Investment and Labour Mobility Agreement, TILMA, reached in April 2006 between British Columbia and Alberta to strengthen enforcement and dispute resolution and to harmonize labour credentials and business regulations and standards by early 2009.
Considerably more needs to be done to enhance the flexibility and functioning of our internal markets from coast to coast. Business regulations and standards, including those of the financial sector, need to be harmonized across Canada. Dispute resolution and enforcement under the Agreement on Internal Trade need to be strengthened, and, to make our labour markets more flexible, trades and professional designations should be recognized and fully transferable across the country. A significant first step would be for others to adopt the British Columbia-Alberta accord.
The Bank of Canada too has an important role to play in helping the economy to adjust to economic change. The bank's monetary policy aims at keeping inflation low, stable and predictable, which, in turn, helps Canadian businesses to read price signals more clearly, respond to relative price movements more promptly and allocate production resources more efficiently.
I will conclude by saying that uncertainty, risks and shocks will be as much a part of tomorrow's economic picture as they have been in the past. We all have a stake in Canada's economic well-being, and we all have a role to play in improving our flexibility and adaptability. From that perspective alone, this committee's study of issues related to internal barriers to trade is timely and important.
Thank you, Mr. Chair. Mr. Murray and I will be happy to respond to your questions and comments.
The Chair: Thank you, Deputy Governor Jenkins.
Senator Segal has arrived and is representing Senator Meighen, who is out of town.
I promised Senator Eyton that he would have first kick at the can today because he often sits way down at the end and we do not see him from here.
Senator Eyton: You probably have not missed a great deal.
Thank you for coming here today and for your clear remarks. As you know perhaps better than anyone, these are volatile times, which are international to a degree. Canada seems to be performing on a national basis better than other countries. Particularly against the U.S., but even worldwide among G8 countries and so on, we are doing well.
However, within all the national numbers, we have regional differences and they are significant. I think, particularly from a negative point of view, Quebec and Ontario, or Central Canada, seems to be most adversely affected while other parts of the country seem to be doing well.
In that context, it is important that we change or reduce international barriers. Do you sense any urgency in this matter? I take it from the history that was related in your remarks and the remarks of our chairman that this change is proceeding slowly. Do you sense now a greater urgency to address internal barriers and to make our system smoother and more flexible?
Mr. Jenkins: Yes, senator, I think the challenges that we face as a country demand that we look at these internal barriers expeditiously. As I suggested in my remarks, I see this issue as a shared responsibility.
The challenges relate to the type of environment we are in, the types of shocks we have experienced over the last 10 years. There is every reason to think we will continue to see economic shocks going forward, so we need to have an economy that is flexible and adaptable.
In addition, when we look at demographic challenges, for every group we meet with in the bank, regardless of sector, one common theme is the demand for skilled workers. We need an economic union called Canada that is flexible, and can adapt and respond to these challenges. I see these challenges as immediate. For me, I would say yes, this is something we need to pursue.
Senator Eyton: I understand the need for pursuing the changes but the question was directed toward some sense of urgency with respect to government authorities and to the general elimination of these barriers in a cooperative way. We see the problem; do we see action?
Mr. Jenkins: The example of what has been done in TILMA, the agreement between Alberta and British Columbia, sets a bar that others should strive to achieve. The framework is there. From my perspective, the agreement provides a good framework for others to look at and move toward adopting. I think there is a need for that sooner rather than later.
Senator Eyton: What do you suggest about the agreement on internal trade, AIT, that was approved originally or became effective in 1995? In your remarks, you seem to favour TILMA over the AIT. Do you suggest that TILMA might be a better model?
Mr. Jenkins: I first confess that I am not an expert in the details of these internal trade barriers and all the details around them, but there are some differences between TILMA and AIT. For example, in terms of the architecture, the AIT requires them to sign on and have consensus; whereas in TILMA, everything is included unless there is an exception. I think the philosophy is different in many respects from that point of view. Structurally, they are different.
Senator Eyton: Are you familiar with the dispute settlement provisions in TILMA?
Mr. Jenkins: Again, I am not familiar in great detail, but it seems to me that the dispute resolution mechanisms in the agreement on internal trade have not proven to be ones that are exercised and used vigorously over time. From my understanding of what is in TILMA, it represents a better model from a dispute resolution perspective.
Senator Eyton: Given the various people who speak to you and the representations that are made to you, what do you consider to be the single most difficult internal barrier in Canada? What would you eliminate today, if you could?
Mr. Jenkins: We look at the issue from a macro-perspective, where we see the need for the economy to have a capacity to respond to shocks, developments and rapid change. From that point of view, we look at it in terms of the importance of having this flexibility in product markets and labour markets — goods as well as services.
It is not so much that one aspect that needs to be focused on as a priority. However, I do think we need to look at the broad scope of what is in place, and the changes that can be made to improve that flexibility. We have made considerable progress on the labour market productivity side and labour mobility side, but more needs to be done on the product side, which is goods and services.
John Murray, Deputy Governor, Bank of Canada: You anticipated one of the things I wanted to say. I wanted to loop back and then connect with you.
First, on urgency, I can see why you asked the question. Things are going well; how urgent can it be? There is a sense that we have made more progress than some people appreciate, if we compare the flexibility that the Canadian economy has shown in responding to the latest series of shocks to what happened in the 1970s.
If you had told Canadians what was in store by way of shocks, movements and commodity prices 10 years ago and asked them what they thought would happen to the Canadian economy, they would not have predicted the sort of outcome we have seen. The urgency comes from two things, maybe more, but one is the extremes we see in regional and sectoral differences, which are a little greater this time around. We do not know if they will dissipate or become even more exaggerated.
The other thing is that as the world becomes more connected and open internationally, we could argue that the distortions we allow to persist domestically become more serious and pernicious. It is as though we have forces internationally pulling us one way and we have inhibiters domestically that fight those forces. There is a risk that through that conflict, things become more distorted in a situation that is more placid or tranquil internationally.
In terms of priorities, it is hard to say. I think Mr. Jenkins referred to a study that the International Monetary Fund, IMF, completed recently that showed Canada had made gains with regard to labour market flexibility. More can be done, but they identified product market rigidities as an important culprit. This evidence was not only circumstantial but also empirical looking at — I will call it the productivity disappointment in Canada. The evidence pointed to the product market.
That said — always one hand on the other as an economist — a lot of the work that the Organisation for Economic Co-operation and Development, OECD, has published shows that the labour markets are still the ones that matter the most.
Senator Massicotte: Mr. Murray has been with the Bank of Canada for a long time. In fact, I knew him when he had no grey hair, and that is a long time ago. It just happens he has been deputy governor for the last two months. I wanted to clarify that.
Mr. Jenkins, your presentation talks about transparency, flexibility, the need for regulations and standards to be harmonized and so on. You mentioned the number of shocks you have been through, and Mr. Murray made a comment regarding how well we have performed through these shocks.
Let us talk about the one current shock, the turbulent credit markets. Obviously, transparency, flexibility and harmonized regulation not only applies among provinces but internationally as well. When we see how the world is threatened as it is now — no one knows the answer to how severe the impact will be or when we will overcome it — what lesson should we learn from what is happening now relative our regulations, transparency and flexibility? Should we have done something to avoid this situation? If so, what should we have done?
Mr. Jenkins: That is a good question and one that a considerable amount of work is underway on, both domestically and internationally. However, transparency is clearly one of the key issues that you touched on.
The products that were structured, the collateralized debt obligations, CDOs, the asset backed and securitization products, were put together in a opaque way. Investors paid insufficient attention in terms of what those products contained. Therefore, there was a question of how to value them. From that perspective, I think one clear lesson learned is the need for greater transparency in terms of what is in these products and, therefore, how they can be valued.
We have been working on these issues from the point of view of what we feel we can take back in terms of collateral, as we undertake operations using our balance sheet. Again, when we undertake operations and take collateral, we need to have a clear sense of how we can value that collateral and value it properly. We need to know what is in these products. Therefore, I think one key lesson here is the transparency issue.
Senator Massicotte: Approximately a year and a half ago, a lot of hedge fund managers appeared before this committee. The risk managers of major banks came to talk to us. We specifically asked questions relative to these products and we asked if people understand what is involved. They said, ``Of course.'' We asked if they had all kinds of systemic risk tests within their banks, and if they used those tests. They said, yes, they were not exposed.
The conclusion seems to be that no matter what the regulations are, it is a human failing that every five or ten years we convince ourselves en masse that these things are good. Then, five years later, we find out they are a disaster.
Is there a solution to this problem? What can we do from a regulation or policy standpoint to avoid that problem? It seems to be one of our character traits.
Mr. Jenkins: We need to make these instruments more transparent. We need to ensure that investors know what is in these products. Even in the context of credit rating agencies, too much reliance was placed on the credit rating of a particular instrument. Of course, that is one piece of advice but investors must dig deeper and have documentation that is clear and simple that tells them what is in those products. That transparency is not happening.
Senator Massicotte: Finally, Senator Eyton raised the most important issue: How do we make them more transparent? What is the motivation for policy or political people to get there? The theory seems to be clear; it is easy to understand. However, there is no impetus, per se, to take the plunge and proceed with difficult work and a potential political hard sell.
Some people — I think the economist of the Canadian Labour Congress — came here and said, ``We do not see the benefit.'' The economist used all kinds of examples. I think you make references to, or you list, the benefits. He made arguments to say, there is no benefit. However, obviously when we hear that view, it significantly reduces the motivation of political people to take on the burden.
Let us examine TILMA, for instance. Have any studies said, ``Here are the benefits that will occur and have occurred. Here is the percentage of growth that will occur.'' How credible are the numbers?
Mr. Jenkins: In the case of TILMA, the answer is, it is too early. It will be implemented fully in 2009. I do not think one can point to concrete evidence in the context of that answer. We have talked to some of our contacts out west in terms of that issue. There is a sense that the progress to date in implementing the agreement is having a positive impact in terms of workers moving from one province to another.
I go back to my opening statement because I think there is a conceptual point that is important. Our message is a little different from the other messages that you have heard. There is an issue with the removal of trade barriers, in this case, internal barriers. I think there is plenty of evidence if one were to look at, for example, international trade and the removal of barriers. I will try to explain this issue conceptually, and Mr. Murray can help me.
Most of the presentations you have seen have been in terms of whether the removal of these internal trade barriers will allow the country to have a higher level of productivity, or a higher steady state. Historically, many measures have not necessarily shown a large impact. I question those measures. I think there is a real need to update those studies.
Our message is different. Our message is: We have a production potential, a capacity to produce, in this country. We want an economy that can respond to developments to keep us at that potential as often as possible. We know shocks will come. We will be hit by a housing correction in the United States that will affect our manufacturing sector in terms of exporting windows, doors, lumber and so on. However, we want an economy that recognizes these developments quickly and can shift the resources as required from one sector to the other, so we can maintain the economy overall at that production potential.
That message is different than the one I think you have been hearing. The more successful we are in adapting to these types of shocks and keeping the economy at full employment, the higher the level of income and welfare we will have over time. We will have a stronger economy than we would have had otherwise; stronger than if it takes a long time to adapt when we are hit by a shock.
I think the importance of that part of this issue has not truly been addressed. This message is a macroeconomic stabilization one. Look back over the last 10 to 15 years at the types of shocks we have addressed. We are an open economy. We need the capacity to adapt.
That is our message. It is a different one, but it is one that, from any metric, is important.
Senator Massicotte: Allow me to summarize. It is interesting. You said the scientific studies to date do not show any significant contribution to a higher level of income, if you wish, or higher gross domestic product, GDP, from those adjustments. Also, removing obstacles does not necessarily increase GDP. However, removing trade barriers permits a faster adjustment to shocks.
Is that a good summary?
Mr. Murray: Much of the early literature on this issue, the empirical studies, tended to show that the welfare gains from trade liberalization, whether international or internal, domestic, were positive but not that significant. Experience has shown in two ways that finding was a reflection of the deficiencies of our model more than an accurate measure of the prospective gains.
More recent work tends to suggest that these three types of improvement — and I will speak to them in a second — are truly significant. Our own experience informs that. We can think of the free trade agreement with the U.S. I can remember the work we did at the Bank of Canada in trying to predict how much influence that agreement would have on behaviour, exports and imports. We tried to anticipate the change in flows.
It turned out that, within a remarkably short time, the volume of exports and imports we saw, movement in both directions, was more than twice what we had predicted. I cannot generalize and say that in every case there will be such a dramatic change. However, that example indicates the sort of underestimation some of these models have had.
There are three types of benefits from free trade, as Mr. Jenkins mentioned. First, by freeing the constraints on behaviour, we produce a level adjustment and everything works a little better, maybe not instantly and not for everyone. That kind of gain is a static one. Productivity is higher, output is higher, choice is wider and costs are lower, typically.
Second, the dynamic gain from trade is the improved growth through time, which is the larger part of the benefit. Third, as Mr. Jenkins explained, along that improved growth trajectory, it is also possible to reduce the cycles in the economy by making it more flexible to ensure, if not all the time, at least more of the time, that we are close to full employment and capacity. There are three ways in which we can benefit from removing trade barriers. I suggest that both experience and the modeling we do tend to attach more significance to those gains.
Although it is still early days for TILMA, there is a natural presumption that it is helpful. I am not trying to cast aspersions on anyone else that has presented before the committee but in any trade discussion, whether international or domestic, certain groups will be hurt by any change. Those groups benefit under the present conditions and are usually a more cohesive and coordinated than the large number of people who benefit a little but who, if we add up all the little benefits, represent a collective gain that is enormous.
You cannot bring all those people into the room at the same time and they would not have the incentive to do so anyway if they only benefit a little. The negative voices tend to be heard more often. If you tell me that a number of groups and witnesses that have come before the committee suggest that the gains are small or even negative, then you might have seen some of those negative voices.
The Chair: No one has mentioned the concept of a national securities regulator.
Senator Harb: You talked about economic shocks. A few days ago, the Federal Reserve in the United States announced a $200-billion fund to stabilize the market. The Bank of Canada announced about $2 billion. If we do the math, the ratio is 100:1. Does that difference mean the problem in the U.S. is 100 times worse than it is in Canada? Many people in the market will wonder why the Bank of Canada injected only $2 billion.
Senator Moore: It was $4 billion.
Mr. Jenkins: First, I will indicate what this coordinated action was about because it was not only the Federal Reserve and the Bank of Canada that took action but also the European Central Bank, the Bank of England and the Swiss National Bank. These actions were to provide what we call ``term lending'' to the financial markets. The objective is to provide to financial institutions access to term lending, in our case for 28 days, as opposed to overnight lending. Thus, financial institutions have a degree of certainty in terms of accessing this lending from the Bank of Canada and, with that, in trying to address what we call ``liquidity pressures'' in certain funding markets that they see further out the yield curve than only overnight.
The coordinated actions announced this week were similar to what was done in the first part of December, 2007 where we, too, announced that we would take actions similar to the Federal Reserve to provide term lending.
To your question, I do not think you can do the math that simply. The $200 billion is an accumulative amount that the Federal Reserve has made available. The sense of your question is correct in that these liquidity pressures have been more intense in the United States than they have been in Canada.
Senator Segal: I will come back to the internal trade question. Specifically, I want your counsel relative to the apparent lack of success of the internal trade agreement over time, the agreement between British Columbia and Alberta. There was also the prospect of Quebec making a separate agreement with Ontario, pursuant to an agreement in principle the Premier made with France, and the movement of licensed professionals from France to Quebec, and perhaps to Ontario and vice versa, to create a kind of labour mobility.
Bank of Canada people are always talking about having national securities regulators and other things that are not necessarily within the frame of reference of our present Constitution. However, one does not need to be a radical federalist to conclude that the trade and commerce power is a federal power and that a slightly more assertive posture on the part of the federal government, of any affiliation, with respect to interprovincial trade and the movement of labour and goods and services, would be good. Those opposed to that posture can then sue the federal government, in a sense. There is the notion of reversing the onus.
To be fair, many self-regulating professions have made progress on mobility rights within their profession. Why would a licensed pharmacist in Thunder Bay have to prove the capacity again to be a pharmacist in Manitoba? In some cases, the professional groups have moved to reduce some of their barriers.
I would be interested to hear the bank express a view on this suggestion, informally or otherwise, that to magnify the efficiencies within our economy, we need the federal government-of-the-day to be more assertive with respect to the trade and commerce power. There was a reference in the most recent throne speech to the importance of the trade and commerce power. I am not part of the government but I support it. I do not know what they meant by that reference, other than perhaps some initiative in this respect.
I am interested in hearing your views, to the extent that you feel comfortable sharing them, relative to whether a more assertive position would be constructive, whether we must be more aggressive about these efficiencies that are now denied Canadians, and whether it is easier for Europeans to move from country to country with respect to employment and other opportunities than it is for Canadians to move within one country. That lack of movement is a source of some frustration and must have a cost for our economic productivity.
Mr. Jenkins: I will try to cut into that question in a couple of ways. We have an economic union called Canada. We want that economic union to be as efficient and productive as possible and, therefore, we need to look at it from a national perspective in terms of what is needed to give those efficiencies in product markets and in labour markets — the things that we bring together to sustain a standard of living. That is the perspective one must take. When we think about these issues from a broader trade perspective, I would argue that multilateral approaches to trade and the removal of trade barriers is clearly what we want to do, as opposed to bilateral arrangements. That is not to say that bilateral arrangements are necessarily bad but we can end up diverting trade as opposed to creating trade as a public good for everyone to benefit from. The broader macro-perspective — the multilateral perspective — is important.
From that perspective, without going into the details of your question, as an economist, I see the need to take that view from that global, international perspective.
Mr. Murray: To reinforce what Mr. Jenkins said, a lot of experience on the international front can inform what we are grappling with domestically. As Mr. Jenkins suggests, there is a strong presumption that something multilateral, harmonized and consistent is better because it minimizes the trade distortions that can arise through a patchwork of bilateral arrangements.
The other side of this issue, though, and we have seen it in international trade, is if we cannot make progress multilaterally for some reason — although, as you point out, in a federal state, one would think the scope should be more promising — sometimes a bilateral agreement is a good start. One hopes the trade-distorting effects that are associated with the agreement in terms of the relations with third parties are not too serious, but if the benefits that one can secure, even bilaterally, are large enough, they are worth obtaining, and it may provide an example, a template, for the multilateral solution.
I think there is a lot of hope among economists that TILMA can provide such a template and a motivation, and that as long as it is not out there too long and it is not followed by a sequence of other balkanizing agreements, it could help drive something that is more multilateral.
Senator Massicotte: I did not understand the answer to Senator Segal's question. I will make it simpler. Do you agree with Senator Segal's interpretation, and many people's interpretation, that the Constitution allows the federal government to impose free trade?
Mr. Murray: I do not think we pretend to be constitutional experts. We were speaking as economists, and it is hard for economists to say multilateral is not better.
Senator Massicotte: To make a presumption, you have no opinion. However, if it were possible, I think the question is: Would you be in favour of the federal government imposing its will?
Senator Segal: As economists.
Mr. Jenkins: I will come back to the way we approach the question. If we think of this economic union called Canada consisting of a number of different jurisdictions, then we want something that is multilateral from that point of view. We want something that harmonizes these markets from coast to coast to coast.
Senator Segal: My next question is in that same vein. I think I understood you to say that, as a matter of monetary policy, assertiveness with respect to the trade and commerce power on a multilateral basis across all Canadian jurisdictions would not be a source of negative concern to the bank. The bank's role to give advice in respect to managing monetary policy and to be concerned about the value of the currency, and the productivity and competitiveness of our economy overall.
Mr. Jenkins: I agree with those statements.
Senator Segal: My next question on the multilateral theme that you both deployed is the question of greater North American integration. Obviously, we have TILMA at one end of the country and strong north-south draws between the Houston-Dallas-Los Angeles-Seattle-Vancouver-Calgary axis, for good, substantial and legitimate economic reasons. We also have what Premier Charest is trying to do with respect to Ontario and the relationship with Europe, and his advocacy, by the way, of a free trade agreement with Europe as something that would be good generically for Canada. These two initiatives raise the question of our own hemispheric integration as a matter of economic preference, understood there are a series of political and other constraints. There are different values in terms of the size of the countries in Europe — there is not the same imbalance as we have in North America — but the Europeans have achieved huge efficiencies and benefits by virtue of that integration and by virtue of a common approach on currency.
Do you see the bank advocating any of that kind of courage any time soon, or will you take the generic position that integrating monetary policy or greater integration with respect to trade would have more negative impacts than positive impacts? I think it is fair to say that the previous governor was cautious on the issue of any integrative approach that might suggest a common approach of some kind to currency. However, I do not want to put words in your mouth.
Mr. Jenkins: Let me put the answer in terms of a cost-benefit analysis. What I mean by that is that when we look at this issue of North America economic integration — and particularly in our case, it comes up in the context of a common currency — the point we have made, as an institution, is that our current framework, which includes a flexible exchange rate, provides an effective means for the Bank of Canada to run monetary policy appropriate to our domestic situation.
When we begin to think about what is required in terms of sustaining good economic performance by broadening out the geographic area to include, in this case, North America into a common currency, we immediately go to issues such as the movement of labour from one country to another. There must be mechanisms. Our discussion today on internal trade a subset of that issue, which I think is what you are getting at, senator. We want to have mechanisms that allow the economy to adapt to changing circumstances.
In the context of a common currency, or some representation of that context, there would have to be certain prerequisites, I would say, for that to work in terms of sustaining good economic performance in Canada. One of those prerequisites would be the ability for labour to move across the border.
There are clear, significant obstacles to that movement. We need to think about what is required. At the moment, given the situation we face, the adaptability we achieve through a flexible exchange rate is what enables us to run monetary policy to Canada's best interest.
Senator Ringuette: I do not pretend to speak for my colleagues, but I think that from the witnesses we heard, we all agree that removal of barriers is good for one's economy. We have gone a long way in terms of labour recognition, and even the unions have taken good steps in that direction. I would say the unions have gone even further than certain professions.
However, the biggest barrier to freeing trade within Canada from one province to another — and you said this in your presentation — is the increasing regional economic disparities. If the economy is good and the infrastructure is good, the risk of losing a little bit in one sector is relatively low in relation to the gains there might be in another sector.
I see TILMA as being two provinces with certain trade relations already established that have striving economies and that will have great infrastructure. Energy is not an issue in regard to supply. They are in the perfect situation to make this agreement happen. However, the situation is not necessarily perfect in other regions of the country. There is a possibility of an agreement between Quebec and Ontario.
I am from Atlantic Canada. I look at the state of our economy and I look at policies and regional discrepancies that are not becoming smaller but bigger.
How can the Bank of Canada, through your policy of keeping inflation low, stable and predictable help Canadian businesses — and I know it is limited — reduce regional economic discrepancies so that the fear and the risk factors are lessened and there is a possibility of greater movement of human resources and products?
Mr. Jenkins: That is an excellent question. It is important to keep the current situation in perspective. In many respects, what we are going through today is the reverse of what Canada went through following the Asian crises, the Latin American crises and the Russian default. Through the period of 1996, 1997 and 1998, the global economy was weak. Commodity prices plummeted and the exchange rate moved down significantly. We went through a period with a significant readjustment and shift of resources, in that case, out of the resource sector and into the manufacturing sector. Manufacturing employment and output rose significantly for a number of years.
What we are going through currently is, in many respects, the reverse of that situation. We have had five or six years of strong global growth and high commodity prices. Canada's exchange rate has moved up, and it has been difficult for some regions and communities, absolutely. We understand that. We are going through a process that involves this shift of resources out of manufacturing into other sectors of the Canadian economy.
I would argue that all regions of Canada, including Atlantic Canada, benefit by having more adaptability and more flexibility in our Canadian economy.
The current situation in Canada with the resource boom, if you like, out West generates a significant income gain for Canada. An economist calls it a terms-of-trade increase. Because our products that are sold internationally are now worth more, that income increase is felt across the country. We see the benefit of that increase. I believe that all regions benefit by having more flexibility and adaptability in response to changing circumstances.
In terms of what the Bank of Canada can do, we can do two things. First, by having a policy focused on low, stable inflation, that policy enables the business community in Atlantic Canada, Ontario, Quebec and out West to see what we call price signals: What is happening in the world economy that we need to respond to? With a low, stable inflation environment, those market signals become much more direct and clear, and people can respond to them much more efficiently.
The other aspect here is, indeed, keeping the Canadian economy as close as possible to its overall production potential. We believe that with a low, stable inflation environment there comes an economy that performs better overall than it would otherwise, and we can keep the economy at that production potential.
That, in turn, facilitates this adjustment, if we are operating at close to full capacity. We look at it from that macro- perspective, but monetary policy has an important role to play here.
Senator Ringuette: I agree with what you stated about keeping inflation low, because it is a national standard. We establish a national standard in regard to the inflation rate, or should I say, we try to.
However, we must bear in mind that when an economy of an entity, whether it is a province or a country, experiences a decrease in activity, the temptation to increase barriers to protect oneself — it is a self-protection reaction — increases. We have seen that reaction in the U.S. in the last two years. The state of the economy is worsening and, therefore, everything that has free trade or freer trade attached to it is seen as a menace.
Mr. Jenkins: The protectionist sentiment.
Senator Ringuette: That protectionist sentiment is because of the state of one's economy. It is the same situation in the Atlantic region in regard to putting up trade barriers. It is a self-protection mechanism that is used.
Mr. Jenkins: That situation is exactly what then leads to a more difficult adjustment and larger employment losses.
Senator Ringuette: We need strong federal leadership.
Senator Moore: I have three issues I want to ask you about. On the third page of your presentation, Mr. Jenkins, you mentioned that the business regulations and standards, including those of the financial sector, need to be harmonized.
What about a single securities regulator? It seems to me the former chairman, Governor David Dodge, was supportive of that, at least personally. What is the position of the bank on a single securities regulator?
Mr. Jenkins: The bank has not come out saying one necessarily needs a single regulator, but we need a harmonization of regulations, and that harmonization can come in a number of different ways. The Minister of Finance talked about a common set, a uniform set is another word I would use, but a harmonization of securities regulations. There are several ways that harmonization can come about, but that harmonization, that uniform, common need for regulation on the securities side has been the bank's position and remains the bank's position.
Senator Moore: Senator Segal or maybe Senator Massicotte touched on the matter of balkanization of the Canadian economy. We have a couple of strong provinces, Alberta and B.C., and maybe someone will join them, Quebec and Ontario. They are powerful trading blocs. Maybe, Mr. Murray, you were responding to this.
Looking at that possibility versus the trade and commerce part of the federal government, is that power not being taken away? Is this an unintended consequence? We tell these people to standardize, to come together, to remove barriers, so they do it, and they create a powerful trading bloc, which may or may not need federal involvement, or not as much. What about that consequence? Do you see any problem down the road? These agreements are separate blocs. It is not like everyone is taking away one barrier. These people are doing something. All of a sudden there are two, three or four various super-trading blocs.
Mr. Murray: As I indicated earlier, that agreement could create benefits of a sort obviously for the two partners in that arrangement; for instance, a series of bilateral arrangements. However, more broadly, it can create complications and distortions. We have seen a lot of this internationally, especially in the Asian region, where there has been a plethora of bilateral arrangements that have complicated trade in the end through this patchwork. This practice has been given a name. It is called the ``rice bowl problem.'' It is because all these noodles become so intertwined. I am mixing metaphors, but they become like a Gordian knot. I do not mean to suggest that Canada could get into a situation as complex as that one, but clearly, it could become a problem if people proceed bilaterally, even if they are large and powerful.
The positive part is that if they are large and powerful enough, maybe they can bring the others along with them and centre on a good solution for everyone. If they could organize the agreement more centrally in a more coordinated, multilateral way, we would have a more beneficial result.
Senator Moore: In your comments, you said that an efficient and sound financial system enhances overall economic flexibility, helps to redirect capital, and so on.
Senator Massicotte touched on the matter of the recent historic meltdowns of our chartered banks. I believe that last November or December, the Bank of Canada provided financing of $30 billion, did they not?
Mr. Jenkins: In December, we announced a term lending that was similar to what we announced this week. The first leg was $2 billion and the second leg was a minimum of $1 billion.
The Chair: Were you paid back?
Mr. Jenkins: Oh, yes, we take collateral, as I mentioned earlier.
Senator Moore: I bet you do. I want to ask about the collateral. Last June, we heard from banks who told us that of the 7,000 hedge funds in the world, they deal with only 100. They perform due diligence and have no problem with their investments and so on, or with financial instruments. Ten days later, the world started to fall apart. The U.S. came to the fore. Then, as we went into the fall, the Canadian banks started to acknowledge their exposures of hundreds of millions of dollars.
In terms of having the ultimate economic flexibility within our economy, we have seen the chartered banks cut back their lending to commercial and personal creditors. You talk about the transparency of the financial instruments. Do you have requirements in that regard? Do you agree to lend a certain amount based on what is given in return?
For example, how do you put a value on asset-backed commercial paper? We read in the financial papers that accountants are looking for guidance on how to value these things. How does that issue impact on the overall financial system and the flexibility? I think we are experiencing a restriction of the flexibility within our economy because of this issue.
Mr. Jenkins: I will tell you what we are doing in this regard. In the last few days we have put out a consultation paper, which is on our website, with the intention of beginning to accept asset-backed commercial paper as part of this provision of liquidity using the Bank of Canada's balance.
Senator Moore: You are accepting it?
Mr. Jenkins: We will begin accepting asset-backed commercial paper, but we have put out for consultation a list of criteria that we would deem to be appropriate for us to accept that asset-backed commercial paper, so that we can value it.
We have two basic objectives. Let us set aside for the moment the structured products and the difficulties around that, but the asset-backed commercial paper market has grown rapidly. When you look at that market in terms of the bank being able to provide liquidity and take assets back as collateral, the asset-backed commercial paper is something we need to look at.
The other part is that we want to do this in a way that we can value these assets when we take them as collateral. In working with the financial community, putting in place standardized documentation would indicate clearly what is in these asset-backed commercial paper products so that we can value them.
This exercise is underway at the moment and we will complete it by the end of March. That work will enable us to begin to take asset-backed commercial paper as part of our market transactions, providing those products meet certain criteria.
Senator Moore: So without regulation you are addressing the transparency that is needed.
Mr. Jenkins: Through this exercise we are trying to encourage more standardized and transparent documentation of these products.
Senator Massicotte: What are the loan maturity dates?
Mr. Jenkins: Typically in the past, when we undertook these types of repurchase agreements, it was to provide overnight financing. We are looking at the possibility of providing this sort of term financing on a more regular basis. Again, in both instances, if we accept this asset-backed commercial paper, we need to know what is in that product.
Senator Massicotte: Is the term 24 hours or thirty days, renewable?
Mr. Jenkins: It is typically overnight.
Senator Massicotte: Is it renewable?
Mr. Jenkins: Yes, they can come back to us the next day.
Senator Massicotte: They can do it 365 times for a whole year?
Mr. Jenkins: Again, we typically undertake these transactions in the context of achieving our overnight target for the overnight rate. We undertake these open-market operations as required, and we can repeat that operation the next day.
Senator Massicotte: How much money do you expect to put into it?
Mr. Jenkins: It can vary.
Senator Massicotte: Do you expect this initiative to resolve the liquidity problem with asset-backed commercial paper?
Mr. Jenkins: ``Resolve'' is a strong word at this point, but these efforts are all to try to improve the functioning of these markets.
Senator Eyton: Is there any organized market for these securities? My sense is that the market is chaotic and your dealings would be almost necessarily institution to institution. Am I correct?
Mr. Jenkins: When we provide this lending facility, it is to a particular institution, for the most part; members of what we call the large-value transfer system mechanism, primary brokers, if you like. We deal institution to institution with institutions that have a line of credit with us. The issue is being able to accept a broader set of collateral, in this case asset-backed commercial paper, but needing to know what is in that product.
Senator Goldstein: Mr. Jenkins, it is always enlightening to hear you.
Welcome, Mr. Murray. I am sure we will hear from you more often.
We have wandered far afield from the specific issue of barriers to trade. Given that we have already wandered, I have one last question.
We have seen financial institutions in Canada, predominantly banks, value their various assets that are stricken and to try to market them. Sometimes they have succeeded and sometimes they have not, because sometimes it is hard to determine what market is in the context in which we have been dealing.
As a result, we have seen a number of institutions continue to indicate in their quarterly reports, and sometimes more frequently, that they are taking additional write-downs, which is an appropriate and responsible thing to do.
Do you have any sense as to whether the bulk of the write-downs to be taken have been taken, or do you expect further write-downs of a significant nature?
Mr. Jenkins: I will answer that question from a global perspective because the issue is global. Much of the origin of the issues that we are all confronting emanated in the U.S. subprime mortgage market. On top of that, these products are part of these structured products, these CDOs and so on, and that comes back to Senator Massicotte's initial question around transparency.
One issue the financial system is still grappling with globally is indeed this issue of the size of losses and writedowns that need to be taken, and then there is the issue of the need for recapitalization of these institutions. From that global perspective, there probably will be indeed further writedowns. The U.S. housing market alone has gone through a significant correction, but we know the correction is not yet over. I will not comment on any individual institution, but from that global perspective, given the nature and source of these issues, I think that is a fair and honest response to your question.
The Chair: Gentlemen, we deeply appreciate your coming here today for this ad hoc, first-blush look at the subject of the interprovincial trade circumstances. We will take careful note of your evidence as we prepare our report.
Before you go, I will exercise the chair's prerogative following from the last few questions. An adjective made famous by the previous governor, Governor Dodge, is ``extraordinary.'' We are witnessing the most extraordinary bank meltdown in the history of banking. Suggestions have been made that perhaps our committee should have special hearings on the issue. Other views are that, no, the stability of the whole system is at stake, and whereas maybe there might be failures on the horizon, there is no indication that any Canadian banks are about to fail. How did it all happen, and why did it happen, and should we be delving into these questions? Because we value the wisdom of our central bankers here, is it your view that, at this time, we could profitably study some area arising from this credit crunch, or is it better to wait until the dust clears? Would a study be destabilizing?
Mr. Jenkins: With all due respect, chair, I think phrases like ``credit crunch'' and ``bank meltdown'' are ones that one needs to be careful in using. Clearly, we are going through a process with this securitization that we have seen over the last three or four years and this distributive model in terms of securitizing assets off-balance sheet. Clearly, there are issues around that process. We are seeing some of the reintermediation effects coming back onto bank balance sheets. The issue is complex, but I would be happy to reflect on it and come back to you in terms of what your committee might do. It would be premature to suggest one particular aspect at this point.
The Chair: It is interesting that when we decided to study hedge funds, Governor Dodge, at that time, was of the view that these funds, although viewed pejoratively by some quarters, were an interesting and valuable new element in capital markets at the time, and he encouraged us to look into them. We did not finish that study because one thing led to another.
As you say, there is dangerous inflammatory language that central bankers and ministers of finance and banking committees must be careful about using in terms of the system generally and the integrity of it. I suppose the central banks had to do what you described because there was a freeze in the short-term of overnight credit between banks. I suppose that credit dried up because they did not know what was there and they, to use a colloquialism, chickened out. The freeze took place, and it can only be alleviated by your institutions doing what you are doing with the protections you have built in.
Mr. Jenkins: The liquidity issue is only one aspect to the set of issues that we are all dealing with at the moment. Hedge funds are only one aspect of what is a much broader set of issues.
The Chair: We will follow up on that subject.
Mr. Jenkins: I would be happy to reflect on what I think would be beneficial. You have to see how the pieces fit together to decide where you want to cut into it.
Senator Moore: This exchange between Mr. Jenkins and the chair is interesting. Last June, by way of teleconference, we heard a witness by the name of Warren Buffet in connection with our hedge fund study. His company had one, and he shut it down. It cost him a lot to do it, but he got out of it because he could not seem to control its valuation and so on. We asked him what to look for in Canada in terms of whether these funds will cause a problem. His answer was, keep an eye on your chartered banks. He was right.
The Chair: Gentlemen, thank you so much for coming. We value your input, and we look forward to the ongoing relationship between this committee and the Bank of Canada.
To our new witnesses, I apologize for the delay in starting. Our whole process has been delayed this afternoon for a number of reasons, and you have been patient. Hopefully, you found it interesting listening to our senior witnesses from the Bank of Canada.
In any event, you are here to talk to us about the statute in place for the farming industry with respect to insolvencies. The Farm Debt Mediation Act was explained to us last week, and government officials have appeared before the committee with respect to the act.
Today, we have with us from the Canadian Federation of Agriculture, Ron Bonnett, Second Vice-President and Glen Snoek, Farm Policy Analyst. I think they have followed our hearings and know where we are in our study. I see them nodding. I hope I am right because this study has been a long voyage for us. It goes back several years, but we are trying to obtain full input to enable us to issue a report on the framework legislation around bankruptcy, insolvency, restructuring of businesses and so on in this country. We are nearing the end of the study, and we want to know more about your industry.
Ron Bonnett, Second Vice-President, Canadian Federation of Agriculture: Thank you for the opportunity to present. We appreciate the invitation. I want to say up front, it is always good when a farmer follows a banker rather than having the banker chasing the farmer. That comment comes from experience.
To provide background, Mr. Snoek is a researcher with the Canadian Federation of Agriculture. I actually do farm. I have a cow-calf beef operation near Sault Ste. Marie, Ontario. I want to give you a bit of background on the Canadian Federation of Agriculture. I am not sure how many are aware of the makeup of that organization. We represent a number of commodity organizations as well as general farm organizations from around the country. Approximately 200,000 farmers are represented within our membership. We try to bring consensus on policy positions as we move forward.
Before we begin, it was interesting listening to your discussion with the banking community on interprovincial barriers. We might at one time want to make a presentation to you about some of those barriers. From the farm perspective, a number of barriers, mainly from the regulatory side, affect the competitiveness of farm operations, depending on where one lives. I am glad to see you are delving into that issue.
I want to give you background on agriculture and where the industry is before talking about the Farm Debt Mediation Act. In general, one thing we must acknowledge is that agriculture is a little different from other businesses in that we have exposure to a multitude of risks. They are not only financial risks; they are weather, market, policy and regulation risks as well. All those things can have a major impact on what happens to the profitability of farms. Volatile commodity markets are becoming almost the norm. We have seen shifts recently in commodity prices that reflect that volatility.
In addition, farm operations are capital intensive. Suddenly, changes in financing rates, the price of equipment and the price of fuel all have major impacts on profitability.
In terms of risk, one of the most recent examples is beef producers across the country who were doing a good job until 2003. Suddenly, incidents of bovine spongiform encephalopathy, BSE, snapped shut the export markets that we had built up. Those markets were shut down.
With that said, I think it must be recognized we have done an amazing job over the last number of years on improving labour efficiency and adopting new technology in the agriculture industry so that we were competitive with other jurisdictions where no other factors were in place.
We have come through a period of low commodity prices, particularly in the grain sector, that placed a lot of stress on farm operations. The recent turnaround is welcome news for farmers. One thing you must recognize, when you have these commodity prices and farm incomes falling, is that the effect is a lot broader than only on farms. The whole rural community is interdependent on that strong primary sector being able to pay bills on time; everything from truckers to feed supply companies, service industries and machinery repair garages.
To read the papers now, you would think that things are rosy in the agriculture sector. The grains and oilseeds sector has turned around. Some of that turnaround will be tempered by increased costs for fuel, fertilizer and other input costs, but the dramatic turnaround in the grains and oilseeds sector has been driven by a number of factors. One primary factor is the U.S. policy on biofuels, which has taken a lot of grain out of the market.
On the other side, we now have a livestock sector that is now under stress that was doing well previously because of low grain prices and a low Canadian dollar.
It is under great stress because of high feed prices and the high Canadian dollar, which has reduced our export capacity. In hogs and cattle, most of what we produce is moved into that U.S. market, so suddenly we have a 30 per cent to 40 per cent difference in our cost structure because of the change in the dollar.
In the farm community, we work on slim margins and we are highly capitalized. Sometimes we need a buffer to carry us through the bad years. If the cash flow dries up for a period there is always the risk that a creditor will become nervous and jump in.
A number of lenders have been cooperative when farmers have problems paying the bills, but there have been examples where lenders have become a little gun-shy and have decided to move in quickly on the farm. That situation goes back to the point of why the Farm Debt Mediation Act was created in the first place.
When people jump in and sell off assets, often the true value of those assets is not realized. It becomes a fire sale; it is hard to capture the equity that is there.
You heard last week from Agriculture Canada. From the transcript we saw, there were many remarks on how important the program is and how it has worked well. We agree that the program has worked well. A few flaws could be fixed, but issues will arise with any program. One thing that comes to mind is that the process itself sometimes is quick. When a farmer goes into farm debt mediation, that farmer will sit down for a day and work through some of the issues and solutions. Sometimes, I am not sure if there is enough time in that process to evaluate not only the short- term needs but the long-term needs as the farmer moves ahead. We have had cases where farmers followed the farm debt mediation process and a short-term deal was worked out, then a short time into the future the farmer tried to renew the line of credit and suddenly the bank said, ``Now that we know you have had exposure there, we do not want to extend this line of credit.'' That situation creates another crisis. That issue needs to be looked at in the future.
From conversations we have had with our provincial partners, sometimes there is not always a mirroring of the efforts that are taken with provincial farm debt mediation processes and federal processes. Some provinces have their own mediation process. They recognize different types of assets. They may go through a process and gather information, but if the federal process then comes in later, the farmer must go through that whole discussion again. One thing to look at is to coordinate the activity at the federal and provincial levels.
Another thing is that the federal act has a two-year restriction in place. If the farmer goes into farm debt mediation and works something out, that farmer cannot come back for two years. There have been cases where mediation has been done for possibly financial or market reasons and if there is a crop failure within two years, the farmer does not have the opportunity to go back. Some provincial programs have the ability to look at extenuating circumstances and go back in to see if they can do something to solve the problem.
The overall goal is to see if that farm operation can be brought into a financial position to continue; to pay the bills to the suppliers and protect those jobs that are on that farm as well.
Stories are starting to circulate that some banks are not necessarily fond of the farm debt mediation process. In one case I know of, the bank tried to jump in in advance of the farm debt mediation process and put foreclosure procedures in place. At that time, one is into a situation of litigation and foreclosure, and the farm debt mediation does not work then. Our position is that there should be an opportunity to use the mediation process.
There have also been stories of some banks asking farmers to sign waivers saying that if they take this loan they will not utilize the farm debt mediation process.
Those things cause concern.
The Chair: Are the foreclosures where the financing has been on equipment, as opposed to land and buildings?
Mr. Bonnett: Sometimes, the financing has also been on livestock as well.
The Chair: However, the financing is not on the home and the section?
Mr. Bonnett: The one I am aware of was on livestock, during the BSE crisis. The bank wanted to jump in quickly and grab what was left before anyone else came in. They tried to jump first before going through the mediation process.
The Chair: I gather from your comments that when these people jump the gun, or are not favourable to the Farm Debt Mediation Act, there was recourse to the Bankruptcy and Insolvency Act from time to time as well among farmers?
Mr. Bonnett: It can be used. The Bankruptcy and Insolvency Act can be used still. We have had instances where the banks preferred to go that route rather than through the debt mediation process. However, one point we try to make is that mediation and bringing the partners together is a mechanism for finding a solution where all the money is not wasted on legal fees. All too often, we see cases where there is financial stress, but a plan can be put into place to save the operation. However, because everyone decides to hire legal experts, all the assets are sucked up in solving that problem, as opposed to looking at what the solution might be and how to move ahead with it.
That is one reason we think the program is important.
To go back to the beginning, the mediation process came into place during the 1980s when interest rates went high. On my own farm, I paid 24 per cent interest at one time. A number of farmers at that time went through the farm debt mediation process. They put a package together that helped them through it. Some people may say that with the increase in commodity prices, and the changes in the support programs, maybe we do not need this process, but I argue that right now we likely need it more than ever. The level of farm debt in Canada is higher than it has ever been. It is higher than in the United States. If we had a shift of interest rates of 1 per cent or 2 per cent, suddenly there would be a financial crisis on farms. We need a tool like this one if that type of crisis hits.
One thing that came out of discussions with our provincial partners is that this program has been so successful that maybe even other small businesses want to look at this model. It is easy to go to the idea of litigation and lawyers, and try to solve the problem that way. As I said earlier, they end up sucking up the assets and do not solve the problem. It is important to keep a program in place that deals with that situation.
It might be worthwhile to call in people who have been directly involved with the process, such as mediators and farmers who have been affected by it, and ask if they can suggest specific things to make the program work better.
In our notes, we mention that we do not view this process as a method of eliminating debt. We look at it as a process for managing that debt and trying to save something from what often becomes a bad situation. It is a salvage type of approach, as opposed to writing off all the debt. That is not what we are asking for.
To summarize the key points going forward, federal-provincial cooperation in the process is a key. Another point is raising awareness in the farm community and the banking community about how the program works and how in reality it is likely a benefit to both the farmer and the banker, to salvage asset value, and in many cases, turn farms around so they can become profitable in the future.
We must ensure that the mediation process is maintained as a tool because if there is a shift in interest rates, we could see another crisis such as we saw in the 1980s, because of the high level of debt that exists.
Those points summarize my core comments. I am open to questions.
The Chair: Thank you. It is encouraging to hear. If I understand, this process is one that you and the members of your federation like very much.
Mr. Bonnett: Yes.
The Chair: If it ain't broke, don't fix it. On the other hand, we are here. If tinkering is required, this is your opportunity to outline recommendations so we can put them in our report.
Mr. Bonnett: If I was talking about a piece of machinery, I would say the process needs a paint job to spruce it up a bit. However, it is still a solid tool that works.
Senator Massicotte: To summarize, you are happy with what is happening and you have recommendations, but overall, the process is a good instrument.
My understanding of the instrument, from what I read, is that it is simply a temporary mediation process. No one can force anyone to mutual agreement. A third party comes in and has you talk to your creditors to come up with a reasonable solution. You are pleased with that process. It seems to work and, in other words, there is value to it.
Mr. Bonnett: It works on a short-term process because of the introduction of that third party. In these situations, when farmers need mediation the farmer and the banker sometimes do not talk to each other. The process identifies the core issues and the solutions. I think the only thing that should be given thought is once they reach that short-term solution, what things need to be done to ensure they build a long-term plan. They do not want a solution and then end up two years down the road with a situation where the line of credit is pulled and the farmer is into a crisis mode again.
Senator Massicotte: You said earlier that we need to inform the banks better that this process exists and it works well. Is that to suggest that banks do not know it exists or that they do not like it?
Mr. Bonnett: One problem we are running into with a number of banks now is that agriculture represents increasingly less of their portfolio. They do not have as many local managers who understand the process. Often, the farmer has a relationship with their local manager, but that person may not be the agriculture expert. That person may not understand some of the tools that can be used to help solve the problem before they become problems.
Senator Massicotte: Is enough money lent to your sector by the banks?
Mr. Bonnett: It has not been as large an issue lately. I must compliment the Farm Credit Corporation. If you asked my opinion of the Farm Credit Corporation 25 years ago, it would not have been a healthy conversation. However, that organization has been turned around to become much more farmer friendly. They filled in some of the gap.
It depends on where we are in the country whether the banks are involved actively in agricultural lending. In the Western provinces, where they have active agricultural communities, the banks are engaged. In the Eastern provinces or Northern Ontario, they do not have as good representation in the banks as they could have.
Going back to the question of whether banks lend sufficient money, in some areas, yes and in some, no. The Farm Credit Corporation has stepped in to fill that void. It goes back to the core issue of ensuring that frontline people in the banking community understand what tools are available because those people are the contact persons for the farmer.
Senator Massicotte: You argued convincingly that farmers need this act. However, as you well know, the rest of the community — businesses and individuals — does not have access to this mediation process.
Why is it important, from a policy sense, that the agricultural sector be treated differently than 99 per cent of all businesses in Canada? Why should they be treated separately?
Mr. Bonnett: If you look at the presentation, this process is such a good thing that maybe small businesses should mirror it. The interest rate crisis in the 1980s triggered this process. At that time, farms had come through a period from the late 1970s to the early 1980s of large-scale expansion of their investments in the farm — buying new technology, constructing new buildings, expanding operations and taking advantage of export markets. The farms were highly capitalized. Therefore, when interest rates flipped, it was even more dramatic for farms than for other businesses.
That situation is what started this process. However, it has worked so well as a tool that it is something other small businesses might want to examine. In the long run, if we look at the cost to the economy, it is less costly to go through a mediated solution than a litigation process.
Senator Massicotte: You said high debt levels are still an important issue. Will levels not increase? Wheat and corn prices are up significantly. Obviously, the value of farm land will go up. I suspect it will be even harder for the transition from generation to generation of farmers.
Mr. Bonnett: There may be some escalation in land values because of higher grain prices. You heard from the farm community that our neighbours to the south were highly subsidized over the last number of years. They received huge cheques in their mailboxes to keep their farm operationsgoing.
However, to keep our farm operations going, we needed to go to lending institutions and capitalize our operations. That capitalization left us in the high-debt situation. The farm debt we are dealing with is as much a result of the difference in subsidy levels in the two countries as anything. If the World Trade Organization, WTO, gives us a result to everyone's satisfaction, that difference might be a thing of the past.
Capitalization may increase, but it will increase based on profitable prices for grain. That situation is different than capitalization resulting from trying to compete on the subsidy basis.
Senator Massicotte: If the economics work well, less land will be devoted to cattle and more land will be devoted to more highly profitable grain.
Mr. Bonnett: I am having that discussion with my wife right now.
Senator Harb: You raised three points that I would like to ask about.
The first is that in some situations, farmers must sign waivers when they go to the bank to borrow money. Is it your view that, perhaps, an amendment to the act should be made to prohibit either the farmer or the bank from asking for such a waiver to be signed?
Mr. Bonnett: We would support having some change. We would not have that ability for them to sign waivers because it does a complete end run around the act and does not give the farmer the backstop they may need.
Senator Harb: Second, do you suggest the committee perhaps add a provision? You mentioned that if a farmer were to go through the mediation act, that farmer is prohibited from going back for two years. You suggested we should have a clause where extraordinary circumstances are recognized allowing that farmer to go back to mediation. Is that clause also suggested as an amendment?
Mr. Bonnett: I want to add extenuating circumstances. In no way do we want this tool to be one where farmers that do not do what they are supposed to do, can continually go back. We are not asking for that change. We are asking that if they need to go back before two years for circumstances beyond their control or for valid reasons, there should be a mechanism to do that.
Senator Harb: Third, you gave the impression that when farmers are in mediation, in some situations everyone seems to be rushed. They go in quickly, and mediation either works or does not work and they leave. Is it your position that there should be a reference that reasonable time is given so that regulations are developed to define what constitutes reasonable time, for example?
Mr. Bonnett: I suggest that issue is something to be discussed as you look at amendments to the regulations in the act. They do not want to go through the mediation process quickly and realize that maybe if they had taken a couple more days, they might have reached a better solution.
Senator Harb: When the bureaucrats appeared before us they told us from their perspective that the system works. The budget is $3 billion and they were not in a position to say, we need more money to increase our bureaucracy. That is not something they would tell us.
You may be in a better position to tell us from your perspective whether you the system is working. Do we need to allocate more resources, for example, to the system?
Mr. Bonnett: On the issue of resources, you have to recognize that this process will be demand driven. We may go through a period now where prices are rising, and where there may not be as much demand, especially on the cash crop side. We may see more demand for the livestock side. If we saw a shift in interest rates, then I think special funding would be needed because of the demand.
At the present time — and Mr. Snoek may nod or shake his head the other way — that issue about funding for the program has not been raised by our members. Having said that, I think we must recognize that if, all of a sudden, we had a major shift in interest cost, then more resources would need to be allocated.
Senator Harb: Do you have any statistics in terms of how many of your people have gone through the process and what the level of satisfaction is? Is there any feedback that you can share with us?
Glen Snoek, Farm Policy Analyst, Canadian Federation of Agriculture: In terms of feedback, we put this question out to our members when we were requested to appear before you. The feedback we received was not to change the program. They like it the way it is. They hoped you are not trying to get rid of it. The feedback is good. We do not have specific statistics on how many people were successful through that process. I do not think Agriculture Canada tracks those statistics either. That is probably something important you might want to look at in the future.
The Chair: The person who had statistics is the gentleman who runs the program.
Mr. Snoek: Also, to address the issue of costs, what was fed to us was that there seems to be a duplication of services between some of the provincial acts and the provincial mediation processes. Sometimes, farmers spend days, weeks or months working with a provincial mediator, but as soon as the federal program is triggered, all that work is for nothing and they start again from square one and go through that process as well. There are probably some synergies, for lack of a better word, to reduce costs in that area and take advantage of work that was previously done.
Senator Ringuette: I agree with you that the Farm Credit Corporation, since its inception, has shown great progress and has responded positively to the farming community, from what I have experienced. I have two questions.
What is the situation in Quebec in regard to the state of farm co-ops there and the Farm Debt Mediation Act? Would farm co-ops have a particular angle in regard to the act, compared to non-co-ops?
In relation to your statement about the bank waivers, I know farmers sometimes are caught in a bad situation. If they do not sign the waiver, they do not receive the loan or the line of credit. The issue is, how we can legislate an obligation for a bank to provide a line of credit to a farm? We cannot legislate an obligation for a bank to remove the waiver from the loan or line of credit because they will say they will not lend to you. It is a chicken-and-egg situation.
Maybe I am reading it wrong and there is more to it that you know.
Mr. Bonnett: The example of the waiver was one bank and I will not necessarily give out that bank's name now.
Senator Ringuette: Maybe you should.
Mr. Bonnett: Maybe I should. I want to verify it before I say it.
I do not see the issue of legislating around the waiver issue as spelling out for the bank what their lending and security policies are. If someone meets the security policies and the lending policies in the bank, they should not add an additional waiver to go around a tool that was designed not only by the farm community but the banks were involved as well when the discussion for this process took place in the 1980s. That tool was designed to be used. It seems to go almost against the whole spirit of the act. Maybe public pressure on the banks might play the same role, or perhaps even the discussion about putting a legislative stop on the waiver.
Senator Ringuette: Sometimes it helps with policy building.
Mr. Bonnett: Yes, it is surprising what can move that way. However, the point I wanted to make is that it is an issue, because it is not a simple process today for farms to switch banks: everything from establishing a relationship with the loans officer, building a history with the bank and something as simple as providing financial statements in the manner that different banks want them. The process to change banks is complicated, although I have done it a couple of times but that was for other issues. Sometimes, it is about personalities as well.
I suggest that the idea of stopping the waivers may be one thing to put out for discussion, and see what kind of a response comes from the banking community.
On the issue you raised with respect to cooperatives, I am not sure but we can look into that question if you want information.
Senator Ringuette: I would be interested to see how that works.
Mr. Bonnett: At the Canadian Federation of Agriculture, we are pushing the idea of cooperatives now; taking a look at investment tax credits, et cetera, as a tool to stimulate more investment in cooperatives. Developing now are a number of new markets for farm products, whether they are niche markets with specialized food products, or the development of biofuels initiatives or biofibres. There are a number of products out there where farmers can be more engaged in co-ops. Anything you can do to push changes in policies on co-ops we would appreciate as well.
Senator Ringuette: I have always been a strong supporter of farm co-ops for reasons of efficiencies in reaching a niche market, because a critical volume is needed to reach that market, and requires the sharing of equipment and installation.
Senator Eyton: I confess that until last week I did not know about the Farm Debt Mediation Act, so it has been a revelation to me. The testimony we have heard has been encouraging and complimentary of the process in general. I take it from your remarks you feel the same way.
As a result, I am curious and interested in the process of mediation and how it works. I like to understand how things work. I have three questions that relate to mediation.
Where do you find these ``neutral mediators''? It seems to me they are vital to the success of mediation. Where do you find them and how are they appointed?
What is the experience with secured creditors under mediation? I assume security stays intact and it is part of the body of mediation. However, is the experience one where sometimes they give up some part of their security to come to a kind of compromise with secured and unsecured creditors?
My next question is more a curiosity question: Are farm quotas generally included as assets attached to certain farms, and are they dealt with under the mediation process as well?
Mr. Bonnett: On the first question about appointment of mediators, in many cases there has been a process for selecting farmers who have experience and background in managing their own businesses to work as mediators. There is an appointment process. I believe they are appointed by the minister. Names are submitted for people to serve on the farm debt mediation panels.
Senator Eyton: Who picks them?
Mr. Bonnett: They are ministerial appointments, I believe. On the issue of farm quotas, they are part of any asset; they are an asset to the business.
Senator Eyton: Can they be transferred?
Mr. Bonnett: Quotas can be transferred or sold. One thing they often find is that they are reluctant to move quota around because as soon as they move the quota away from a property, they undermine the ability to make income. Often, that asset is a valuable one that they want to protect.
For instance, in the case of a dairy farmer who may not meet the quota, one thing that would be considered in the mediation process is, are there problems with feeding the cattle so that they are not getting the proper production? Does something need to be put in place to ensure that revenue stream comes in? Quotas are looked at as one of the assets, but it is a core asset that has a lot of value because it has income-generating potential.
Senator Eyton: What is the experience of secured creditors?
Mr. Bonnett: The solution is a negotiated one. All the creditors are around the table when the negotiation takes place and it becomes an art of compromise.
The reason there is a bit of give-and-take is that the secured creditors do not want an unsecured creditor starting a process that could have secured creditors losing more money than they would like to. Unsecured creditors realize they do not have the leverage that a secured creditor has, so likely a negotiated settlement is a better for them. That is the whole concept; trying to draw up what will be a win in this situation and negotiate their way through it.
Senator Goldstein: Thank you, gentlemen, for coming and sharing your wisdom and expertise with us. You have raised two issues that could be of importance in terms of possible amendment. The first is the timing issue; they solve a problem and find themselves shortly thereafter with another problem. The second issue you raised is that of waivers.
With regard to the timing issue, would it satisfy the problem if the statute were amended to say that in exceptional circumstances, the two-year waiting period can be shortened? That is insofar as that is concerned.
As far as the waiver matter is concerned, I can appreciate that an individual farmer is in no position to negotiate with the banker who says, either sign the waiver or no loan. However, surely that situation can also be solved by adding a provision — I have already added it in my statute — saying that any waiver of recourse to any of the provisions of this act shall be inoperative, period. That is the end of that.
No individual farmer says I do not want to sign; and no individual bank can say sign the waiver. If they do, it is inoperative, so who cares.
Would that wording solve your problem?
Mr. Bonnett: I think that is a simple solution to address both issues.
The Chair: Do you gentlemen have any last comments you want to make? We are grateful for your appearance.
Mr. Bonnett: No, only that we appreciate having the chance to discuss the issue with you. As we said, by and large, the process has worked and we feel it is a tool that must be there. It is one of those things that help when everything goes bad.
The Chair: The question arose the other day about who are the mediators? Where do they come from? I gather they are not farmers.
Mr. Bonnett: Some mediators are farmers, yes.
The Chair: Thank you, everyone.
The committee adjourned.