Honourable senators, this item is adjourned in the name of Senator Martin, and I ask for leave of the Senate that, following my intervention, the balance of her time be reserved.

Honourable senators, I am pleased to speak to Bill S-275, An Act to Amend the Bank of Canada Act (mandate, monetary policy governance and accountability), introduced by our colleague Senator Bellemare.

Let me start by observing that even though Senator Bellemare retires in October, she is working as hard as ever, and on many fronts. As Chair of the Standing Committee on Rules, Procedures and the Rights of Parliament, she has been guiding the committee on important rule changes that will improve the way we operate, especially in committees. She is also the sponsor of Bill S-244 on the creation of an employment insurance council, and has made remarkable progress in getting major stakeholders in Canada to support that initiative.

These are complicated and serious issues, but Senator Bellemare is a serious legislator, and she is not afraid of complexity. She is, of course, a PhD economist who has taught graduate-level economics, and served on the Economic Council of Canada. She is a bona fide policy wonk, and the Senate is so much better off because we have wonks like her in our midst.

Bill S-275 is perhaps one of her wonkiest initiatives, and I mean that as a compliment. Her bill seeks to amend the act that governs an institution that has immense power over the lives of Canadians, whose operations are carried out in relative secrecy, and for which a special, often unintelligible, language has been created.

Central banks are a kind of modern-day ziggurat, and central bankers are the high priests who are allowed into the inner sanctum of that holy place. They pore over arcane sacred texts, usually in the form of mathematical models; debate a sort of theology, epistemology and phenomenology; conduct holy rituals that double as press conferences and speeches; and make annual pilgrimages to shrines such as Jackson Hole in Wyoming and Basel, Switzerland.

They are also a little like us in that they have unelected power. Nobody voted for Mr. Macklem, or Mr. Poloz before him, or any of their predecessors; and yet, the governor has an awesome power over the Canadian economy which, in turn, affects every facet of the lives of Canadians. It is in the very design of modern central banks that the governor is appointed by the government of the day, but makes decisions on monetary policy independent of, and possibly contrary to, the government’s wishes. As senators, we also have an awesome power in our ability to amend or defeat government legislation from the House of Commons, but we exercise this power rarely because of the framework within which we operate — that is the Constitution.

The analogous framework under which the Bank of Canada operates is the Bank of Canada Act. The act was passed in 1934, and the Bank of Canada was created the following year — first as a privately owned entity, but it was nationalized by 1938. As Senator Bellemare reminds us, the act has not been amended since 1985, and a lot has changed since that time.

Senator Bellemare is proposing to modernize the Bank of Canada Act by, on the one hand, codifying some of the things that the bank is already doing and, on the other hand, by introducing some new governance features that improve the transparency and accountability of the institution, while protecting its independence.

For example, she would repeal the preamble of the current act, which has hitherto served as a mandate for the Bank of Canada. The preamble states:

. . . it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada . . . .

Did I not tell you that central banks often use unintelligible language?

Instead of this preamble, Senator Bellemare would create an explicit mandate for the bank to be written into the act as follows:

The mandate of the Bank is to ensure the financial stability of Canada and of Canadian financial institutions and to promote sustainable and equitable prosperity and the well‑being of all Canadians.

The novelty in her proposal is the introduction of the words “sustainable and equitable prosperity and the well-being of all Canadians,” as opposed to the preamble’s more generic goal to “. . . promote the economic and financial welfare of Canada . . . .” By doing so, she is codifying what might be called a “dual mandate” for the bank. One might even argue that she has gone beyond a dual mandate by introducing the terms “equitable and sustainable,” which are somewhat elastic in their meaning.

Unlike other central banks, such as the Federal Reserve Bank in the United States, the Bank of Canada is generally understood as having a single mandate of price stability. Interestingly, the current act doesn’t actually say “price stability” and, in fact, can be interpreted as already having a dual mandate through its reference to “production, trade, prices and employment.” Senator Bellemare’s amendment, however, spells out a dual mandate in clearer terms. To this extent, her amendments are not radical.

In fact, the bank enters into renewable five-year agreements with the Government of Canada to determine the monetary policy framework for that period. The most recent “Joint Statement of the Government of Canada and the Bank of Canada on the Renewal of the Monetary Policy Framework” stated that they believe the best contribution of monetary policy to the well‑being of Canadians is to continue to focus on price stability. But they also agreed that monetary policy should continue to support maximum sustainable employment.

Hence, while the current monetary policy framework of the Bank of Canada says, “Focus on price stability, but keep an eye on employment,” Senator Bellemare’s amendments would have the bank focus equally on financial stability and on sustainable and equitable prosperity.

The idea of a dual mandate is not a new one. It has been debated by economists and central bank watchers for many years. During the period of low economic volatility for the roughly 20‑year period since the mid-1980s, which is known as the “Great Moderation,” this debate did not generate much enthusiasm because it seemed like macroeconomic management in industrial economies had achieved a sweet spot in smoothing out business cycles. But this complacency was disrupted by the great financial crisis of 2007 and 2008, which laid bare the hidden leverage of some advanced economies due to the excessive financialization of real assets — which even the banks and investment houses did not properly understand, let alone the regulators.

The world’s central banks at that time had a good, long look at the precipice and only barely managed to stop the economies from falling into it. They did so through a massive expansion of liquidity, including taking debt directly onto their balance sheets in an unprecedented way. This meant lowering reference interest rates that were already low in real terms and, in some cases, going as far as offering negative interest rates. This phenomenon became known generically as quantitative easing or, more euphemistically, as unconventional monetary policy.

We should be thankful that the high priests of central banking broke their own vows and rewrote their sacred texts to accommodate these unconventional policies and, in so doing, saved the world economy from a catastrophic depression. But in so doing, they sowed the seeds for an explosion of borrowing and created expectations among borrowers that ultra-low interest rates were here to stay. Indeed, there was a sense in financial markets and among borrowers that the Great Moderation had been extended through brilliant policy intervention.

What they did not anticipate, nor could they have, was the black swan of a global pandemic that was COVID-19. The pandemic caused an instant global economic downturn that was not due to a failure of aggregate demand but rather a failure of aggregate supply or production. This was, once again, a new kind of macroeconomic shock that the modern world was not accustomed to and for which novel policy responses had to be improvised. In Canada, this meant Canada Emergency Response Benefit, or CERB, Canada Emergency Wage Subsidy, or CEWS, Business Credit Availability Program, or BCAP, Canada Emergency Student Benefit, or CESB, Canada Emergency Commercial Rent Assistance, or CECRA, Canada Emergency Business Account, or CEBA, and Large Employer Emergency Financing Facility, or LEEFF, as well as adjustments to the Canada child benefit, or CCB, and Old Age Security, or OAS. Never in the history of Canadian economic policy have so many acronyms been conjured up in so short a period of time.

By and large, the policy response worked. The basic theory of dealing with the supply-side recession caused by an inability to produce due to health restrictions was to preserve the capacity of businesses to continue operating when conditions allowed them to do so. This was the right strategy. But even so, some businesses could not withstand the prolonged period of inactivity and had to close. Other businesses that survived nevertheless lost some of their productive capacity through the loss of workers or machinery or because suppliers had disappeared or gone into other lines of work. It was thus inevitable that when the economy reopened, industry could not return quickly to pre-COVID levels of activity — and certainly not as quickly as the pent-up demand for their goods and services.

This is why when inflation went on the uptick about two years ago, many economists believed it was, in large part, due to businesses struggling to ramp up production after a period of dormancy only to find that many of their suppliers faced the same problems, leading to shortfalls in production relative to demand hence creating inflationary pressures. This became known as the transitory inflation hypothesis, which was much derided but may, in fact, explain what we have witnessed in the last two years.

In any case — and returning to the theme of my speech — the Bank of Canada responded in the only way it knew how to, which was to raise interest rates. Canadians who did not come of age until the late 1980s, of course, reacted with horror that interest rates could go up hence the gnashing of teeth about whether the bank was doing the right thing and a lot of gratuitous criticism of the governor from politicians and pundits whom John Maynard Keynes would have described as “practical men who . . . are . . . the slaves of some defunct economist.” We see the appeal of defunct economists by some political leaders on another important public policy debate that is currently raging, but that is for another speech.

The point of this pointed economic history is to say that monetary policy and the role of central banks in formulating monetary policy has been in new territory for at least 15 years, and that it is appropriate for the Senate to instigate a reflection on whether the act governing the bank needs to be updated. For that, we have Senator Bellemare to thank.

The centrepiece of her amendments is the creation of a monetary policy committee, which she dubs as the permanent committee on monetary policy. The Bank of Canada already has what is called a governing council that makes decisions on interest rates, but there is currently only one external member on this council. In any case, the accountability rests with one person, the governor. Other central banks have monetary policy committees, notably the U.S., New Zealand and the U.K., albeit using different governance and decision-making approaches.

Senator Bellemare is not overly prescriptive about the permanent committee, but she proposes that it consists of three internal and six external members, and that external members are appointed for renewable three-year terms. Also, Senator Bellemare does not spell out the decision-making protocol for the permanent committee, but she implies that it will be based upon majority voting. In any case, there are important questions about group dynamics and the way meetings are structured as well as the willingness of members to share information that will affect the quality of the decisions taken by the committee as a whole.

Further, Senator Bellemare does not spell out the extent to which the external members can speak publicly about their positions, as is the case in the U.S. and the U.K. But I think her intent is that they should be able to speak openly about how they see the economic situation in relation to the prescribed dual mandate of the bank. In the U.K., external members are individually accountable to Parliament and can be invited to give testimony.

However, an individualistic committee that also happens to be fractious in communicating different views on the state of the economy or the path of interest rates could create confusion among the public, not to mention skewing monetary policy decisions.

Needless to say, the appointment of external members with the requisite expertise is extremely important. Senator Bellemare would delegate this task to the governor, in consultation with the Deputy Minister of Finance, with a third person to be selected by the governor and the deputy minister. She has constructed a very demanding set of criteria for qualification, which includes being recognized as an expert in at least three of the following five categories of technical knowledge: open economy macroeconomics, the financial system, the labour market, supply chains and risk management.

Your Honour, may I have three minutes?

Thank you, honourable senators.

It may prove challenging to find individuals who are recognized experts in three of the five fields. It would certainly take a lot of self-confidence for anyone to put in a CV that they are recognized experts in more than one or two of these fields, but she is right to set the bar high and keep politics out of the appointment process.

I am a little puzzled by one of her proposals, which is to mandate the publication on an annual basis of the cost-benefit model that the bank uses in its decision making. I’m all in favour of cost-benefit analysis, but forcing the bank to reveal its internal economic modelling could be tantamount to giving an advantage to market players who can reverse engineer the model to predict the path of interest rate changes by the bank. One could argue this is simply a more elaborate form of what is called forward guidance, but I think that there are risks to it as we have seen with forward guidance itself.

There is no doubt that the bank relies on a variety of economic models to assist in its decision making and that these models are constantly tinkered with. For the public, and even for highly trained economists, these models are black boxes, and the bank intends for them to be that way because of the proprietary value that comes with the knowledge of what is inside that black box.

If there is one thing that is unifying the recent calls for a review of monetary policy and the work of central banks around the world, it is that the once-stable relationships captured in economic models used to predict output, prices, employment and so on are no longer stable. As a result, central banks, I believe, have become more promiscuous in their use of economic modelling and hence less able to tell a consistent story about transmission mechanisms of external shocks to key economic variables.

All of this reinforces Senator Bellemare’s case for Parliament to take a fresh look at the Bank of Canada Act. There is already a conversation happening among the high priests and theologians of central banking and monetary policy, but in the spirit of theological reform — and betraying my Protestant instincts — I think it is worthwhile for the broader priesthood of all believers also to participate in this discussion.

The original Bank of Canada Act came about because of the work of the 1933 Royal Commission on Banking and Currency. A fresh royal commission on the mandate of the bank would be overkill and, in any case, royal commissions are rather out of fashion these days. It is unlikely that the Bank of Canada itself would take the lead on proposing legislative amendments, nor can we have much hope that the House of Commons would be able to pursue amendments in its current mode of hyper‑partisanship.

Senator Bellemare may well be right that our institution is the best place for a fresh discussion on the mandate of the Bank of Canada. I want to commend Senator Bellemare again for her initiative. While I don’t know that we will be able to adopt amendments to the Bank of Canada Act before she retires, I want her to know that she has colleagues in this chamber who share her perspective about the value of reviewing the mandate and structure of the bank.

I hope others in this chamber will join this debate, and I look forward to hearing your views. Thank you.