A “Strong Juridical Framework”?
Canada did better than most countries when the economy tanked in 2008, most suggest due to our more stringent banking regulations. This morning the news broke that the head of the Bank of Canada, Mark Carney, has been appointed head of the Financial Stability Board, the G20′s agency for regulating markets.
Mark Carney
Finance Minister Jim Flaherty, of the ruling Conservative Party, said, “This appointment of the governor is a credit not only to him but also to the Canadian financial system and our regulatory and supervisory system, which is a model for the world.”
Is this a body, like Benedict has called for, with “teeth”? Is this part of the “strong juridical framework” called for by John Paul II and mocked by certain conservatives pundits?
Here’s a quote from the news article linked to above:
Widely expected to get the part-time posting, Carney may have sealed his appointment in September with his blunt response to American bankers chafing at looming new rules.
“If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon,” Carney told an audience at the Institute of International Finance in Washington, D.C.
And there’s this from Conservative Prime Minister Stephen Harper, quoted in the National Post story:
“Obviously there are some in the financial sector who don’t necessarily like the proposals, and there are some legitimate complaints and in Canada we pay attention to what the financial sector says,” said Harper.
“But that said, one of the things we know is the financial sector can’t just write its own rules. The crash of 2008 made very clear that there must be credible regulatory systems on the financial sector or it can lead us in a position where we don’t want to be. That is being done, that has to be done.”
Can someone tell me if this is good or bad news for American conservatives (not too mention Canadian progressives!), who like to claim that their northern neighbors are a bit of a Republican farm team? I actually have no idea.
Brett Salkeld is a doctoral student in theology at Regis College in Toronto. He is a father of three (so far) and husband of one.
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Here is some more detail on the differences between the Canadian and American banking systems.
I’m no expert on the financial systems of the US or Canada, but I am a Canadian who has taken out several mortgages. Based on my experience, I would mention two factors that might explain why Canada’s banking sector came out smelling like roses, at least as regards to mortgages.
First, even though I would have been an excellent candidate for one (low down payment, on the edge of eligibility, worked with a mortgage broker), not once was anything like a sub-prime mortgage ever mentioned. If we have them in Canada, they are certainly not as prevalent as the were in the US.
Second (and perhaps this is the reason for the dearth of sub-prime mortgages) your monthly mortgage payment (interest/principle/property tax) cannot exceed 35% of your monthly income. It may even be that all debt payments (including credit cards, lines of credit, etc.) cannot exceed 35%.
Like I said, I’m no financial expert but it seems to me that a 35% rule would have helped prevent a financial crisis like in 2008, simply because the mortgage-backed securities would have been fundamentally sound.
Which leads to the question of why US banks were lending to those who had such high debt. Did Fannie and Freddie actually have a role to play? If so, was this not just an example of corporate greed but also govt. greed?
The US banks were lending to people with no hope of paying them back because they knew they could make just as much money on bad loans as on good loans by bundling bad loans in CDO’s. I think it’s been pretty well established that Freddie and Fannie were extremely late to the sub-prime party compared to private banks. But it doesn’t matter whether it was corporate or government greed. What it shows is that Canada’s financial sector is actually a freer market than the American. The Canadian government sets the rules about mortgage eligibility and then stays out of the market itself.
One more rule (mentioned in Blackadder’s link) is that if you have less than a 20% down payment, you have to have your mortgage insured through the Canadian Mortgage and Housing Corporation (a government corporation). But CMHC does not loan money – it only insures mortgages. These premiums are included in the maximum debt payments of 35% of monthly income, and so they act as either a brake or throttle for mortgage lending. If the banks give out too many bad loans, premiums go up and mortgages become harder to qualify for. Fewer bad loans result in lower premiums, which make it easier to qualify for mortgages.
Of course, given the fact that financial markets are global, Canadian banks could have gotten involves in the CDO’s and Credit Default Swaps that it seems to me were the actual reason for the financial crisis. Banks in Europe certainly did. But from what I understand, the Canadian banks didn’t. Now whether that was because of Canadian government regulations preventing them from doing so or from a more cautious mindset in the Canadian banking industry, I don’t know.
I’m nervous about playing government and corporations against each other in the blame game. As long as we don’t attack the corporate state with the recognition that they’re in bed together, we won’t get anywhere. They are the ones who want us to keep playing them against each other. Small government and small business!
Small government and small business!
Impossible. You can’t run a planet with 7 billion people with small government and small business. The solution is not downsizing (think feudalism), but rather a promotion of ethics and governance by subsidiarity.
Subsidiarity was my intent with that sentence. I think it implies certain downsizings where power has become too concentrated. We can always promote ethics, but human beings being what they are, we also need a system that prevents the worst excesses.
“What it shows is that Canada’s financial sector is actually a freer market than the American. The Canadian government sets the rules about mortgage eligibility and then stays out of the market itself.”
Which is what Fannie and Freddie helped distort over its long history. (Though some will argue this was not the case as some will argue that Fannie and Freddie were in fact part of the mortgage meltdown problem. Something the truth of which time will ultimately answer.) Though as Brett notes, and as you seem to agree, big corporate and big govt. greed, and not free markets, were each part of the problem of the meltdown of 2008.
I don’t want to speak for Brett, but I would say that the meltdown of 2008 was the result of structural problems; greed as a structural part of human nature and a lack of regulations (or counterproductive regulations) as a structural part of the market. So both greed and the market were part of the problem (and they remain problems as it seems to me that nothing has been done to deal with either factor).
One could argue that Canadians are not any less greedy than Americans, so the problem for Americans must be the structure of the market. My point is that it seems like Canada’s solution (more government regulations over the market, less government action in the market) not only helped prevent a financial crisis but also results in a freer market.
Speak away.
The US banks were lending to people with no hope of paying them back because they knew they could make just as much money on bad loans as on good loans by bundling bad loans in CDO’s.
I don’t find this a compelling explanation as it begs the question of why anyone would buy the bundled bad loans (I should add that I don’t think Fannie and Freddie were responsible either).
The truth is that most everything the banks did made perfect sense on the assumption that house prices would continue to rise. In retrospect, the fact that people failed to adequately account for the glaring possibility that housing prices might fall is baffling, but that is the nature of bubbles.
I don’t find this a compelling explanation as it begs the question of why anyone would buy the bundled bad loans (I should add that I don’t think Fannie and Freddie were responsible either).
I think this is exactly the issue (albeit slightly moderated). NINJA loans by nature are loans that are issued without any reasonable hope of repayment. The whole purpose of this nonsense was to create portfolio would contain a certain ratio of low-risk and high-risk mortgages, such that the high interest rates of the high-risk mortgages would provide a more attractive ROI to the market, while the low-risk mortgages would limit the downside. Aggregated together, this created what was perceived to be a “legitimate” financial product.
This is where it gets dicey. A responsible bank who only issued low risk mortgages couldn’t sell its portfolio, as the ROI on those mortgages was far too low for the market. Therefore, if I want any hope of selling my portfolio, I need to raise the aggregate interest rate. The easiest way of doing that is to push my brokers to approve junk mortgages at outrageous rates. Therefore, if some sucker walks through my door with no job, and will take a mortgage at a sub-prime interest rate, but which cranks up to 12% after the term expires, there’s no reason not to approve them. As the bank, I don’t care if they’re repaid, as I’m selling them off.
The securities purchasers didn’t understand the specifics of what they were buying. They were relying on the due diligence of the banks. But the banks had no accountability and no reason to implement any – the more they rejected, the less marketable their securities were. They didn’t understand derivatives and assumed the securities purchasers knew what they were doing. The left hand assumed the right hand knew what it was holding, and vice versa. But neither did. Nobody did.
The whole purpose of this nonsense was to create portfolio would contain a certain ratio of low-risk and high-risk mortgages, such that the high interest rates of the high-risk mortgages would provide a more attractive ROI to the market, while the low-risk mortgages would limit the downside.
There’s nothing nonsensical about that. In fact, it can be a pretty sensible strategy. The problem wasn’t that they bundled high and low risk mortgages; it’s that their risk assessments were wrong.
the bank, I don’t care if they’re repaid, as I’m selling them off.
This is like saying that a wholeseller doesn’t care whether his product is crap because he is planning on selling it to a retailer. It’s not an explanation, as it doesn’t explain why the people buying the loans wouldn’t care.
Greed is always part of the system if you’re talking about a wide-open free market. It’s just hard to believe that nearly four years later people are still wondering what happened. Indeed, Republican party extremists are still touting the same discredited ideas that led to the mess. When you see the differences between Canada and the US, I’d think it would be obvious that the US lacked the kind of government regulation that would have kept the banks from self-destructing and taking homeowners down with them. It was indeed a structural problem: the lack of outside regulation allows greed to go unchecked in a capitalist system. No big mystery there, although how it all played out was complicated enough to allow Michael Lewis to go on selling books about what happened indefinitely. That makes one capitalist happy, but when is the rest of America going to wake up and fix what was broken?
BTW, subsidiarity doesn’t equal downsizing; it’s more a principle of competency than smallness per se, and it depends on government keeping systems working smoothly at all levels. Government can’t remain small and do that in a modern state…unless you’re talking about, say, Monaco, and even there a competent government authority would probably have to employ as many sharks as the main casino.;-)
Greed is always part of the system if you’re talking about a wide-open free market.
Greed is always part of the system regardless of which system you are talking about. People were just as greedy in the Soviet Union (or, for that matter, in present day France). The advantage of free markets is that they tend to make that greed less socially destructive.
Following Blackadder’s link back a few layers leads to this interesting post where the (Canadian) author maintains that the Canadian approach to bank regulation is actually more hands off, but also more principles-based (whereas he compares the US approach to bank regulation to babysitting.)
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/04/canadian-vs-us-bank-regulation.html
Interesting read.
If this characterization (and that in other articles that brought me there) is correct, I think most free market conservatives/libertarians would find this approach more congenial than the American approach. (Business interests might or might not do likewise — though one of the key things to keep in mind here is that there is a big difference between free market and pro business.)