Bank of Canada Governor Mark Carney.Peter Power/The Globe and Mail
Dear members of the House of Commons finance committee:
You are about to grill Bank of Canada Governor Mark Carney and his top deputy, Tiff Macklem -- formidable opponents, to be sure. I look forward to watching the proceedings via webcast. Regrettably, I won't be able to attend in person.
Undoubtedly, you already have prepared some questions for Canada's top central bankers. Mr. Macklem made some important points about productivity and the labour market earlier this month. And Mr. Carney, well, we've heard a lot from him recently, haven't we? That's a good thing. Some in the markets found it difficult to grasp Mr. Carney's message after a speech in British Columbia a couple of weeks ago, but there was no confusion over the Bank of Canada's plans for interest rates after last week's press conference: for now, we're sticking with lower for longer.
All these themes warrant further elaboration, and no doubt you have thought up some original queries. But I also understand that doing the people's business allows little time to fully digest all that's going on out there in the global economy. With that in mind, I humbly propose a few questions for Messrs. Carney and Macklem that the press corps failed to ask at last week's press conference:
Suggestion One
At the G20 Summit in Toronto in 2010, the emphasis was on austerity; or "fiscal consolidation," to borrow the favourite euphemism of communique writers. The Group of 20 pledged to cut budget deficits in half by next year and stabilize debts by 2016.
There is reason to question whether this emphasis on austerity was premature, or even a mistake. At its annual meeting in Tokyo earlier this month, the International Monetary Fund released research – see Box 1.1 of the World Economic Outlook that suggests the IMF had underestimated the effect of budget cuts on economic growth.
How should we apply this new perspective to our pre-budget consultations? The Bank of Canada is projecting growth of about 2 per cent next year. That's not great. Should we be advising the minister of finance to ease up on budget restraint until the global economy is back on solid footing?
Suggestion Two
Charles St-Arnaund, an economist who covers Australia and Canada at Nomura Securities in New York, noticed a discrepancy between your outlook for China and that of your counterparts at the Reserve Bank of Australia.
The Bank of Canada's policy statement last week suggested that economic growth in China has slowed a bit, though "there are signs of stabilization around current growth rates." The RBA seems to see things a bit differently: "Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago," Glenn Stevens, the governor of Australia's central bank, said in a statement on Oct. 3. "Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe."
Granted, a few weeks separate the RBA's policy announcement and your own last week. Still, given the importance of Asian demand for commodity prices and Canada's terms of trade, could you elaborate on the Bank of Canada's relatively optimistic outlook for China?
Suggestion Three
As head of the Financial Stability Board, you are at the centre of the overhaul of international financial rules, yet the press almost never asks you about it.
There are a couple of FSB efforts that seem likely to affect Canada's finance industry: the plan to target banks that are systemically important to individual economies and the initiative to single out insurance companies that could be too big to fail.
Canada's biggest banks represent a bigger share of gross domestic product than do the largest in the United States. Are Canada's big five or six banks systemically important? Are the country's banks likely to face tougher restrictions, or be asked to hold more capital, as a result of the FSB's plans for domestic systemically important banks?
And on insurance, Canada has three insurers that rank among the Top 15 globally in terms of assets. Does this make them systemically important? The insurance industry argues that the business of insurance is unlike banking, and therefore poses no threat to the financial system. Is that true? What about AIG?
Perhaps you'll find these useful once the second and third round of questioning rolls around? No need to credit it me, just trying to help!
Good luck and enjoy the testimony,
Kevin