Canadian Banking more regulated, but did not experience a meltdown.

Economics Economics Questions
1

On another forum I encountered this argument:

Free marketers always claim the “bust” and other problems of capitalism have their root cause in gov’t intervention. However, the most intense periods of gov’t intervention in the market occurred in the post WWII Bretton Woods era which also coincided with the most stable era in modern capitalism. It was only when economists began to tear apart the post WWII structures that major problems which the West hadn’t seen since the Great Depression started to occur again.

In an other example, we have two countries with the same language and essentially the same business culture yet in 2008 one suffered a severe banking crisis while the other reported few if any problems. The former (US) had steadily deregulated its system since the late 70s while the latter (Canada)maintained a well regulated banking sector. Now some may claim that it was the peculiar nature of the remaining regulations in the US that led to the meltdown however that only admits that its the type of regulation that is the problem.

Mises well discredits the idea of using historical events discern economic principles in Human Action. However, in replying to someone how does not accept this premise it would be helpful to state some examples of specific and particular reasons that might have caused Canada’s more highly regulated banks not to fail, as those in the US had in 2008. Can anyone help here?

P.S. Norway was elsewhere referenced in the same manner as Canada per above.

2

Well, from what I understand, there was no push from the government to have a “homeowner’s society” in Canada. So while they do have regulations, they also didn’t have that silly public policy initiative.

Also, they apparently have very strict lending requirements in Canada and strict rules about what happens if someone defaults on a mortgage.

3

Proof that Canada has more regulation: none.

4

Does Canada have a fannie and freddie equivalent? I have no Idea. Did their central bank have ultra low interest rates for an extended period? I’m fairly certain they didn’t. Those two things combined with the policy push of a “homeowners society” were by far the biggest factors in our meltdown. This comparison is simply not valid at all.

5

Things like homeowners society policy only determine the character of a business cycle, not whether it occurs.

6

The only way is to teach them the real way business cycles work. The petty details of statutory codes are insignificant.

7

Also their monetary policy must’ve been tighter.

8

10 years ago the CAD was 70 cents US. Now the CAD is 98 cents US.

9

"Also, they apparently have very strict lending requirements in Canada and strict rules about what happens if someone defaults on a mortgage. "

Isn’t that just more evidence that it’s regulations that saved the day?

10

First, what does regulation have to do with business cycles? Regulation causes inefficiencies, not cyclical fluctuations.

Right, stagflation and price controls nearly collapsed the British economy, and devastated the U.S. economy. Also, that so-called period of economic stability had 4 of the 10 worst recessions in the last century (48, 53, 60, 73).

Yeah, when they tore down all ties to gold. Now governments can print as much as they want, whenever they want, and blame the “free market” for cyclical volatility, reductions in real wages, capital flight, ect.

11

Yes. But they were regulations that actually made borrowing money more difficult rather than easier.

We had the exact opposite in this country because of progressivist politics. Groups like Acorn threatening banks unless they made risky loans and so forth.

The left wing’s version of the story is that it’s the greedy bank’s fault, but if you look at Canada’s example, it really shows that our problem was in fact lousy government policies both monetary and fiscal.

It shows that if you’re going to regulate, make money harder to get, not easier.

12

The regulations don’t create the monetary expansion but they do channel it in a certain direction.

13

Lending requirements were not strict by any planetary comparison. People were buying houses with no incomes. If it is true what has been said about the housing bubbles in Canada it may be that we haven’t had the real crash yet. Strangely enough, my credit card limit was jacked up from the $3000 that it started as to $10,000 during the “recession”.

14

You know what banking system would produce no crisis at all? one that doesn’t exists. According to the canadian being more regulated argument then we should have no banking sector!

15

“It shows that if you’re going to regulate, make money harder to get, not easier.”

Just because the US [this time] drove off the cliff on the right side of the road doesn’t prove one should push to fall off the cliff on the left side.

16

@Dave,

I dunno man, just looks like a trade off to me.

17

http://thinkmarkets.wordpress.com/2010/03/18/canada-beats-the-u-s/

http://thinkmarkets.wordpress.com/2010/02/08/canadas-great-escape/

18

http://online.wsj.com/article/SB124165325829393691.html

Here’s a highlight:

Canadian banks operate in a very different context. Copying the Canadian banking system in this country, without understanding how its banking and housing sectors operate, would be a mistake.

Start with the housing sector. Canadian banks are not compelled by laws such as our Community Reinvestment Act to lend to less creditworthy borrowers. Nor does Canada have agencies like Fannie Mae and Freddie Mac promoting “affordable housing” through guarantees or purchases of high-risk and securitized loans. With fewer incentives to sell off their mortgage loans, Canadian banks held a larger share of them on their balance sheets. Bank-held mortgages tend to perform more soundly than securitized ones.

In the U.S., Federal Housing Administration programs allowed mortgages with only a 3% down payment, while the Federal Home Loan Bank provided multiple subsidies to finance borrowing. In Canada, if a down payment is less than 20% of the value of a home, the mortgage holder must purchase mortgage insurance. Mortgage interest is not tax deductible.

The differences do not end there. A homeowner in the U.S. can simply walk away from his loan if the balance on his mortgage exceeds the value of his house. The lender has no recourse except to take the house in satisfaction of the debt. Canadian mortgage holders are held strictly responsible for their home loans and banks can launch claims against their other assets.

And yet Canada’s homeownership rate equals that in the U.S. (Both fluctuate, in the mid to high 60% range.)

For obvious political reasons, debate in Washington spotlights the need for future financial regulation while glossing over the role of government housing and other regulatory policies in the current crisis. This is dangerous: Without a thorough review of relevant government housing policies, laws and regulations, layering new reforms on top of our current system may only set the stage for another housing crisis in the future.

MORE:

When it comes to comparing the track record of the U.S. and Canadian banking systems, it is worth noting that Canada’s regulations did not prohibit the sale or purchase of asset-backed securities. Early in this decade, Canada’s Toronto-Dominion bank was among the world’s top 10 holders of securitized assets. The decision to exit these products four to five years ago, Toronto-Dominion’s CEO Ed Clarke told me, was simple: “They became too complex. If I cannot hold them for my mother-in-law, I cannot hold them for my clients.” No regulator can compete with this standard.

MORE:
Those who blame financial deregulation for the breakdown of U.S. markets should note that Canada shed its version of Glass-Steagall more than 20 years ago. Major banks thereafter rapidly bought and absorbed investment banks.

19

Also, there was a stock market meltdown in mining, which is what the TSX is mainly based on, before the U.S. stock crash. Some investment banker at a libertarian seminar told me about losing like 70% of net worth.

20

Thanks to all for the prompt and extensive answers to my question.