Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
David, I agree that Lord Keynes had strong political opinions as well as an evolving philosophy on economics as his thinking developed during the years between the two world wars. On the political front he remained within the Lloyd George wing of the Liberal Party (and was one of its prime policy wonks) long after most other Liberals decamped to the Conservative Party (such as Winston Churchill) or the Labour Party. Arguably, he was a progressive on lifestyle and foreign policy issues, never a reactionary on class matters but remained very much a centrist on most other political issues. He certainly never was confused with a socialist or social democrat during his lifetime.
His economic thinking was influenced by his political thought but arguably not in the way you suggest. He retained throughout the pre-WW I antipathy of Liberal Party adherents to the Conservative Party but, as a Cambridge Don, he wanted to do his bit to wean bright students away from Marxism which had a strong attraction for many during the 1930s for obvious reasons. He therefore presented his economic ideas as a progressive but anti-Marxist alternative to Tory reaction. In truth, however, his economic ideas provided a basis for public policy development congenial to a broad spectrum on both the democratic right and left to meet the challenges of post WW II recovery and the challenge of Communism in the 1940s. Keynes looked forward to being a leading intellectual in this context but he died before his ideas for the post war world could be expressed.
My point, however, is that most schools of economic thought (and those schools based upon the writings of Keynes in particular) can be used equally by those on the political left or right to good (or bad) effect. In two comments upon the following SA article I go into this in greater detail.
In conclusion, as a Canadian social democrat I undoubtedly would disagree with someone like Bruce Bartlett, the US conservative political commentator, on many public policy goals. Interestingly, however, we each might well employ analysis based upon the writings of Keynes and his followers to make our case.
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
David and Essence,
Arguably you both too quickly conclude that Keynesian macro-economic analysis is inherently a tool of the political left or that it hobbles the democratic process. The better view is that it simply notes the advantage of countercyclical fiscal policy to offset potential or actual booms or busts in private sector expenditure. What form fiscal stimulus or austerity might take is essentially an open question to be decided on a political basis largely extraneous to Keynesian analysis itself. Thus stimulus might take the form of measures generally favored by the political right (i.e. tax reductions favoring the higher income and business communities, subsidies to business, infrastructure supporting industrial development and other ‘trickle down’ measures) or of measures generally favored by the political left (i.e. enhanced entitlements, increased employment within the public sector, reduced taxation upon low income earners and other ‘bottom up’ measures). Likewise austerity can target high income groups (i.e. generally favored by the political left) or all persons equally without regard to ability to pay (i.e. increase premiums for public services on a flat rate basis or introduce a regressive value added tax – measures generally favored by the political right.
In post WW II US Federal politics, a striking example of how both the left and the right have each used Keynesian economic analysis is (a) the support of the defense industry by the political right on unacknowledged Keynesian grounds (even where many of these same representatives on the political right strongly oppose the deployment of certain Keynesian measures that serve to build up the civilian public sector), and (b) the converse opposition to the ‘military-industrial complex’ by the political left but their support for a growing civilian public sector on Keynesian grounds.
You are on sounder ground in implying that Keynesian macro-economic analysis does assume a greater role for the State than does many other schools of economic analysis often favored on the political right. Note as well, however, that over the past two hundred years or so (i.e. the period during which political forces have been analyzed using assumptions assuming that there is a ‘left’ and a ‘right’ in political life) there have been many eras during which the ‘right’ was the ‘pro-state power’ and the ‘left’ the ‘anti-state power’ faction.
In short, the various schools of economic analysis are essentially neutral in the political arena and each of these schools largely serves as talking points and intellectual fodder for political factions on either side from time to time. Arguably, this serves to give structure and order to political debate thereby enhancing the political process without thwarting or biasing the scope of debate.
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
Essence, If Krugman and other classic Keynesians were to advocate (which they clearly don’t) sustained fiscal stimulus during economically buoyant times as well as during recessions, then your fears would be amply justified. It is also true that political leaders too often during buoyant times persist with fiscal stimulus (and central banks with monetary expansion) because they benefit politically and that this both (a) risks inflation and creation of economic bottlenecks and similar dislocations, and (b) depletes the balance sheets of both governments and central banks thereby weakening their capacity later, when the economy weakens, to provide countercyclical support for the economy. Arguably, the US Federal Government and the US Fed acted in the irresponsible way described above in paragraph (b) around 2003-5.
Further, it can be argued that both Japan, during the past couple of decades, and the US, since the 2008 economic meltdown deployed fiscal stimulus weakly over a protracted period and that this had the unfortunate effects of (i) not sufficiently offsetting the private sector contraction, and (ii) running up public debt and the notional money supply over time in ways that had sub-par effect in terms of promoting recovery and also weakened the fiscal and monetary capacity of the Government and Central Bank to address future challenges as these arise.
However, accepting all the forgoing, the fact remains that: 1. The threat of inflation during the period subsequent to the 2008 meltdown has been (and currently remains) non-existent. 2. Should the threat of damaging inflation later arise during the eventual strong recovery, this can be adequately addressed through fiscal austerity and monetary tightening at that time. (Undoubtedly, the fact described in point (ii) above may well make addressing eventual inflationary pressure during the future recovery necessarily more painful than otherwise needs be the case.)
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
Langone doesn’t really address Krugman’s analytical framework, only a comic book version of that framework of Langone’s own devising.
Krugman has over the years been consistent in advancing the classical Keynesian argument that fiscal expenditure should be countercyclical, that is to say: There should be public sector budgetary surpluses during periods of economic growth and public sector budgetary deficits during impending or actual recessions or depressions. The goal of such countercyclical budgeting is to offset private sector booms and busts respectively (or, better still, forestall such lurches off course) thereby keeping the economy roughly in equilibrium.
If this were 2004-5 and Krugman were advocating the running of large fiscal deficits (which he wasn’t at that time), then Langone would have been spot-on. However, in the circumstances that have been experiences in the wake of the 2008 global economic meltdown, fiscal austerity against the backdrop of private sector retrenchment clearly risks returning the economy to recession. In fact, the resulting recession could well, amongst its other ill effects, lead to greater fiscal deficits than would be incurred through timely fiscal stimulus.
Langone in this exchange is merely trying to score rhetorical points with the economically unsophisticated by talking nonsense.
Marc, I was thinking beyond the possibility of the centre-right holding a majority after a snap election. Clearly Silvio Berlusconi remains the central figure within the centre-right regardless of whether he would seek the Premiership or other high office in the resulting government. It is very difficult in light of past history to assume that a Berlusconi dominated government will promote the best interests of Italy or the EU generally insofar as these are at odds with the narrow needs of his ego or for personal gain.
Marc, thank you for the excellent analysis of the short term prospects for the creation of an Italian national government. This however begs two important questions: 1. Is the grand coalition in question likely to have the cohesion and coherence necessary to address the many difficult economic, fiscal and social challenges that Italy now faces and cannot avoid? 2. If this coalition is a necessary short term expedient that, however, will be ineffective should, as is likely, one or more of these challenges comes to the boil, will the ground at least have been established for a further national election out of which an effective and responsive national government can emerge? Arguably the answer to both these questions is "no" as (a) both the centre-left and the centre-right coalitions are in internal disarray which only compounds the disarray over policies and personalities within the proposed grand coalition government, (b) it may well follow that neither such a grand coalition government (or some subset of factions and personalities within that grand coalition) will be able to offer the Italian electorate a credible contender for effective national government when new elections are called, and (c) consequently, Grillo's 5-Star Movement, the Northern League and other obstructionist forces (that in normal times would only play a minor and peripheral role in national politics) will continue to have sufficient support and opportunity to make future Parliaments chaotic and Italy increasingly ungovernable.
I would really appreciate learning that, in the forgoing, I am being unduly pessimistic.
Why Does Anyone Listen To Conservative Economists Anymore? [View article]
Logical Thought, Fair enough – but- Where does one put someone like Bruce Bartlett, clearly a political conservative in the contemporary US context, but one who deploys Keynesian economic analysis to make his case? Admittedly this was much more common during the 1940-60 period a prime example being Henry Luce of Time Magazine and much else who marshaled much time, effort and money to foster conservative economic and political causes through publications framed in Keynesian terms. Even Nixon is famously quoted in the early 1970s as saying “We’re all Keynesians now” (while, conversely, President Clinton arguably deployed Monetarist economic theories in the 1990s). Even Keynes himself in the context of severe shortages experienced in the UK during 1940-2 during the low point in WW II opposed the imposition of rationing (as an unwarranted intrusion by government in the detail of daily life) and advanced in rather strong and innovative terms based on his economic theories proposals to manage these shortages equitably and efficiently without resort to rationing. Conversely, Ben Bernanke subscribes to libertarian political philosophy and Monetarist economic analysis yet, in the wake of the global credit crunch following the 2008 financial meltdown, he has worked hand in glove with those within the Executive Branch who see dramatic monetary easing coupled with fiscal stimulus on an unprecedented scale as the best way forward. My only real points are that: (a) Mass political movements tend to be ‘big tent affairs’ with ever-changing groups joining or splitting off from generation to generation (and with the fashionable ideas of the moment being supported or opposed in ever-changing array). (b) In modern democracies there is a tendency for classes acustomed to the exercise of political and economic power to give leadership to one (or more) of these mass movements and thereby to advance their interests (and sometimes those of the broader society as well) through political parties based upon those movements. (c) Schools of economic thought (and, arguably, of political thought as well) tend to become fodder in the political jockeying of the day. In other words, while political and economic systems of thought are important and serve those giving leadership to mass political movements and parties with potential maps for the way forward, this should not obscure the fact that other factors (emotions, perceived interests, conflicting loyalties, competitors etc.) can have equal or greater impact. (d) In short, mass movements are as much tribal as intellectual in nature.
Why Does Anyone Listen To Conservative Economists Anymore? [View article]
Logical Thought,
The difficulty with this discussion is the lack of a common understanding of what qualifies one as a conservative economist (or, for that matter, what qualifies one as a conservative). Arguably each person knows that this confusion exists but each tends to arbitrarily apply a personal rule of thumb to decide what and who is conservative for purposes of whatever polemic debate is under way at the time. Through much of the first half of the 19th century conservatives in the North America and Western Europe were generally thought to be those who favored a strong and intrusive central government that used the institutions of church and state to support a hereditary landed elite and established religion. By contrast, those who opposed that establishment, be they aristocrats, rich or poor, urban capitalists and professionals or urban workers, generally advocated dismantling most elements of that establishment and the state power by which it was maintained. By the end of the 19th century, the upper reaches of the middle class had gained a significant (often commanding) role within the establishment in most North America and Western Europe states but, in doing so, increasingly supported a strong central government (albeit one to support their economic interests and not a hereditary and religious establishment). This shift tended to blur what was or was not 'conservative' as this reconstituted establishment tended to be less reactionary and more open to limited reform on many issues. This reconstituted establishment increasingly included competing regional, urban-rural, and other economic and social interests and each of these interests increasingly sought to enhance its power by enlarging the franchise to include urban and rural persons of limited means who would follow their lead. By the end of the 19th century these newly mobilized lower orders began pressing their own interests. Thus the stage was set whereby interests or classes from all strata of society increasingly sought to articulate and advance its own preferences of the moment and, for that purpose, to (a) favour a strong role for the state in economic or social affairs insofar as the interest in question sensed that the state would advance its causes, or (b) support a diminished role for the state insofar as the interest in question sensed that those opposed to their causes controlled the state. The important point to note is that literally from generation to generation support for or against a strong and active central government within a class or interest can well shift dramatically. Compounding the confusion, as the opinion within an interest or class shifts, the political party within which that interest or class is strong likewise shifts to accommodate the evolving views of its supporters but often that party retains the name and outward appearance of its past. Further, there are regional, ethnic, urban-rural, religious affiliation and other dimensions to these classes or interests and their opinions (and the evolution of these opinions) rarely proceeded at the same rate or even in the same direction. During times of social or economic stress this struggle over the merits of strong or weak government (and over control of government institutions) intensifies and new and old ideas are mobilized rather indiscriminately by each of the contending forces to buttress their side. Prominent amongst those ideas are those of the various schools of economists. It should not therefore be surprising that, for example: 1. The Austrian School arose in support of classical Liberal political reform in the economic sphere in Central Europe during the closing years of the Austro-Hungarian autocracy but, in the aftermath of the collapse of that autocracy and the rise of reactionary and revolutionary forces between the two World Wars, that School became an advocate for traditional upper middle class economic interests (i.e it started as ‘liberal’ manifestation but continued as a ‘conservative’ but not reactionary one). Arguably, in the current US context it has become the tool of reactionaries. 2. The Keynesian School arguably began as an attempt by upper middle class supporters of the fading UK Liberal Party in the 1930s to compete with rising Marxist and reactionary ideologies during the 1930s. In the immediate post WW II US and UK it evolved into several completion wings including a bland version strongly supported by many industrial leaders. With the eclipse of democratic socialist neo-Marxism and rise of neo-conservative free market ideology over the past 40 years, Keynesian arguments in opposition have been increasingly mobilized in support for a strong economic role for the state. 3. The Monetarist School arguably grew out of the more industrialist friendly wing of the Keynesian School in the 1960s by downplaying fiscal action and playing up the central bank monetary role. Coupled with Libertarian ideas, the focus became fiscal policy independent of political control and to the exclusion of a role for fiscal policy. In the face of the 2008 global economic meltdown, the role of the central banker has shifted again to become a partner with the executive arm of government in the deploying monetary and fiscal powers strongly to stabilize and refloat the economy. In short, economics is a tool which is inherently not tied to the left or right, traditional or reformist, reactionary, progressive, or revolutionary political tendencies. It is simply a discipline around which thought can be organized (or made more obscure and confusing).
Even more central to the current cooling of significant sectors of the Canadian and Australian economies is the fact that continuing relatively high international demand for certain commodities, by driving up the exchange rate of domestic currencies, is making manufacturing, tourism, film production etc. less competitive (i.e. the classic 'Dutch Disease syndrome). While arguably this trend is currently more marked for Australia (see the following article from 'The Economist')
Given that resource extraction and export does not employ nearly as high a proportion of the domestic labour force as these negatively impacted sectors and that those sectors are dominant within the larger States of Australia and Provinces of Canada and within the larger metropolitan areas, one can clearly see why this recent shift has gained national political prominence and casts a shadow over the mood of domestic consumers and much of the electorate.
The future of Canada's proposed $3.3B Ring of Fire chromite mine looks increasingly doubtful as Cliffs Natural Resources' (CLF -1%) financial picture turns cloudier. CLF has been battered by weak iron ore prices and rising costs at its Bloom Lake project, and the site has infrastructure problems; a decision about who has surface rights to the transportation corridor is before Ontario’s mining commissioner. [View news story]
Well said Frederic.
This is a perspective that all Canadian based resource development enterprises need to keep in mind.
I agree that there are many similarities between the economic situations of Canada and Australia at significant points of time over the past decade. Further, on the particular point you raise (i.e. "go hard and go household), arguably the monetary and fiscal authorities in both Canada and Australia saw stimulating the residential housing market and the homeowner renovation market as a way to: (a) prevent the sort of property value and mortgage default implosion experienced in the US, UK, Ireland etc. from occurring domestically, (b) quickly mobilize a 'shovel ready' response to threatened construction industry slowdown, and (c) as a cumulative result of points (a) and (b), help maintain general consumer confidence and thereby general confidence in the state of the domestic economy.
As I tried to suggest in my earlier comment, this tactic was largely successful during the late 2008 to mid 2012 period in Canada and, I believe, the same can be said for Australia. In both countries the fact that (a) the domestic monetary and fiscal situation immediately preceding the global meltdown in 2008 were strong, and (b) export markets for key commodities remained strong allowed monetary and fiscal resources to be diverted to support this "go hard and go household" strategy.
In retrospect, your point that similar efforts should also have been taken to rebuild public infrastructure is well taken. Arguably, the authorities in Canada and Australia, like those in the US and elsewhere, underestimated the nature, depth and duration of the recession and therefore assumed that focusing upon a 'householder' strategy would bridge a 3 or so time span until a global recovery strongly kicked in. In Canada, some efforts were made by Federal and Provincial governments to encourage and fund infrastructure work by local governments but this was largely of the road maintenance and 'build a local sports facility' variety rather than serious public infrastructure restoration. Clearly, if a much greater effort had been made to achieve public infrastructure restoration (possibly coupled with somewhat less focus upon goosing household consumer spending and indebtedness), then the Canadian and Australian economies and societies would be significantly better off than at present. That said, it is easy now to forget how pressing the need was in 2009-11 to make policy decisions quickly in complex and unprecedented circumstances. I would therefore argue that the course actually taken, while by no means perfect, was fairly good.
Pater Tenebrarum’s article is more a recitation of (a) commonly known facts about the current state of global markets as they impact upon many of the things Canada produces coupled with the self-evident observation that this current dip in global demand significantly reduces the rate of current Canadian economic growth, and (b) a simplistic assertion, without supporting facts or analysis, that Canada would somehow have both prospered and avoided its current economic challenges if only the Bank of Canada had maintained unflinching monetary rectitude (and, presumably, the Federal, Provincial and local governments had maintained strict fiscal austerity) throughout the years since the 2008 global economic meltdown than it is a reasoned discussion concerning how Canada’s monetary and fiscal authorities could have better addressed the challenges (c) to the domestic economy in the wake of the global credit crunch following the 2008/9 meltdown, and (d) now, in the face of a protracted state of anemic global recovery, can maintain robust domestic economic growth.
Arguably the better view is that: 1. The Canadian monetary and fiscal authorities, having managed their responsibilities with reasonable prudence during the 12 or so years preceding the 2008 global meltdown, were able to stimulate the domestic economy in the immediate post meltdown period thereby preventing the sort of deep recession occurring domestically that occurred in the US, UK etc. In this they were significantly aided by the fact that the global market for many commodities Canada produces recovered quickly and remained strong until recently. 2. There are unavoidable costs to any set of public economic policy choices and the cost over time of the monetary and fiscal stimulus mentioned in point 1 above was a growth in public and consumer debt and some degree of residential property inflation. Arguably the public and consumer debt growth would not have been materially lessened had policies of monetary and fiscal austerity been adopted (actually, this debt growth might well have been even larger had austerity reigned). By the same token, there is arguably no credible grounds upon which to argue that significantly increased unemployment and a large drop in residential property prices, both of which would have been unavoidable outcomes if domestic fiscal and monetary austerity had been the policy, would have improved the economic wellbeing of Canada, its people or the fiscal heath of Canada’s governments. 3. The protracted delay in global economic recovery and the uncertain future this portends for all nations made the long term continuance to earlier levels of domestic monetary and fiscal stimulus problematic for Canada by 2011/12 and the Canadian monetary and fiscal authorities have over the past 18 or so months been trying to tighten credit and spending moderately in a way that blunts the growth of public debt, cuts the impetus for consumers to incur unmanageable personal debt and prevents the development of bubbles and bottlenecks within the Canadian economy. This policy too has its costs as well as benefits: economic growth has slowed but recessionary pressures have been held in check.
Nothing in the forgoing is meant to suggest that execution of the described public policies might not have been better, only that: A. The policy choices, viewed broadly, were sound for the times in question. B. There are limits to the extent that the Canadian domestic economy can function sheltered from the unprecedented challenges of the global economy during the periods in question. Thus, while Canada avoided the worst of the meltdown engendered global recession for four years, the fact that its economic growth has recently slowed is not a sign of some great failing of policy or execution of policy. C. The prospect for the next couple of years is that the success or failures of the Canadian economy will follow more closely those of its trading partners and the global economy generally (possibly with some delay in effect).
Rumors of an imminent downgrade of Italy are getting no comment from Moody's, but what's really spooking markets is word the Cyprus bailout - going after uninsured depositor money - is now the EU template. Reuters' Peter Larsen notes what one week ago was a special or "one-off" case has now become the "template." Stoxx 50 is now at a session low, -1.5%, led by Italy and Spain each off near 3%. The DJIA -0.5%. [View news story]
It is difficult to draw an adequate analogy that is suitable to explain the current Cypriot situation but consider the following. Suppose the US Federal Government considered it necessary (i.e. for some reason, in the circumstances the economic stability of Central America, the Caribbean and even the US would be seriously impacted if there was a disordered collapse of the mini-state and its banks) to bail out some very small Caribbean nation that had a banking system essentially geared to the attraction of large amounts of illicit foreign money where that banking system was found to be essentially bankrupt and the banks within that system collectively (a) were eightfold the size of the GNP this Caribbean nation, and (b) essentially consisted of deposits of mafia and other unsavory elements that had parked large sums in these banks to avoid taxes otherwise owed to the US or other nations or to hide proceed of narcotic and other organized serious criminal activity (i.e. the banking system was essentially a haven for international criminal, money laundering and tax scam activity . Clearly the options of engineering an orderly guarantee of the obligations of these banks by the government of that mini-state (i.e. as was attempted around 2008 in the case of Iceland and Ireland) or of an orderly winding up of the failed banks (as is routinely done by the US deposit insurance authority for small US insured banks) simply would not work in this situation because the scope of the banks and their crisis dwarfs the capacity of the fiscal and monetary authorities of the mini- state. Further, The US would be loathed to bail out the depositors in this situation for a whole range of legitimate reasons. Would not both practical and policy reasons suggest that this was a unique situation that both called for and justified unorthodox measures targeting the depositors who were using the banking system for illegitimate purposes? Would it not also follow that targeting these depositors in this special situation did not constitute a precedent for targeting depositors in the legitimate banking systems in other states?
Some 40K people marched on the U.S. capital over the weekend to protest the Keystone XL (TRP) pipeline project, whose rejection could cause a deep and lasting rift with the U.S. But perhaps Canada is not such a benign trading partner, according to Huffington Post's Raymond Learsy, who says Alberta’s government has given "generous donations to Islamists with close connections to Hamas." [View news story]
The following article gives a concise and well stated argument in favour of proceeding with the Keystone XL extension.
Banks In The Great White North: Bank Of Montreal [View article]
John and cogni,
I agree with the thrust of your comments.
My take on all this is that with the excessive deregulation of the banking and financial services industries in the US and UK beginning during the Thatcher and Ragan ears (a) the distinction between merchant or investment banking, on the one hand, and commercial banking on the other increasingly disappeared, and (b) shadow banking entities outside the purview of traditional investment banking or insurance (and therefore beyond either the self preservation conventions of those fields and the residual regulatory oversight they enjoyed) increasingly were used to do the heavy lifting of firms within banking that wished to assume greater risk that traditionally was open to them.
Add to this the growth of increasingly advanced information technology, both as a means to mobilize capital globally and to design and deploy trading strategies), and the introduction of strategies imported from games theory and the social and physical sciences to predict the chance of certain outcomes occurring and the stage was set for (a) the illusion to arise that risk could be predicted and controlled in circumstances and ways hitherto unavailable, (b) the allure of that illusion to increasingly override past practices with their inherent limits of exposure to risk, (c) a massive and increasingly out of control free-for all to mushroom.
We tend now to forget that the Canadian banks also engaged in the early stages of all this, got burned but not too badly and, even so, were tempted to continue down the path that appeared to be so rewarding to banks in the UK and US. It was the Canadian Federal Government and the Bank of Canada (i.e. the regulators) that scotched these efforts. Further, when the Conservative Party attained power, they and the Canadian Banks were quite prepared to loosen these regulatory constraints (albeit with some caution) and during the run-up to 2007/8 the way was cleared for the introduction in Canada of some of the practices that later lead to grief in the UK and US. Happily for Canada, this opening to folly was largely closed as during 2006 and subsequently the prospect of serious problems in the US and UK became more apparent.
The forgoing is relevant to our discussion of the expansion of the Canadian banks through subsidiaries into traditionally non banking activities and abroad as it shows that (a) the temptations of such institutions to engage in risky by highly profitable (until inherent problems manifest) schemes is hard for them to resist, and (b) one should not assume that Canadian domestic rules will apply or that they themselves may not loosen.
I don’t, however, want to overstate my case. These banks are generally well run and the Canadian regulators have generally learned from the hard lesson globally of the last decade or more. I simply want to make the point that luck (i.e. Canada experienced fiscal and banking challenges during the 1990s and was able to reform and recover from this well before the global crisis) as well as good practices played major roles in Canada’s recent good fortune in fiscal and banking matters (i.e. don’t over do the wisdom and sound judgment story). Now that Canadian Banks are expanding in new and interesting ways, we need to ensure that they don’t mistakenly assume that they are inherently competent and immune from the temptations that others face in the modern world.
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
I agree that Lord Keynes had strong political opinions as well as an evolving philosophy on economics as his thinking developed during the years between the two world wars. On the political front he remained within the Lloyd George wing of the Liberal Party (and was one of its prime policy wonks) long after most other Liberals decamped to the Conservative Party (such as Winston Churchill) or the Labour Party. Arguably, he was a progressive on lifestyle and foreign policy issues, never a reactionary on class matters but remained very much a centrist on most other political issues. He certainly never was confused with a socialist or social democrat during his lifetime.
His economic thinking was influenced by his political thought but arguably not in the way you suggest. He retained throughout the pre-WW I antipathy of Liberal Party adherents to the Conservative Party but, as a Cambridge Don, he wanted to do his bit to wean bright students away from Marxism which had a strong attraction for many during the 1930s for obvious reasons. He therefore presented his economic ideas as a progressive but anti-Marxist alternative to Tory reaction. In truth, however, his economic ideas provided a basis for public policy development congenial to a broad spectrum on both the democratic right and left to meet the challenges of post WW II recovery and the challenge of Communism in the 1940s. Keynes looked forward to being a leading intellectual in this context but he died before his ideas for the post war world could be expressed.
My point, however, is that most schools of economic thought (and those schools based upon the writings of Keynes in particular) can be used equally by those on the political left or right to good (or bad) effect. In two comments upon the following SA article I go into this in greater detail.
http://bit.ly/18amgIG
In conclusion, as a Canadian social democrat I undoubtedly would disagree with someone like Bruce Bartlett, the US conservative political commentator, on many public policy goals. Interestingly, however, we each might well employ analysis based upon the writings of Keynes and his followers to make our case.
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
Arguably you both too quickly conclude that Keynesian macro-economic
analysis is inherently a tool of the political left or that it hobbles the democratic process. The better view is that it simply notes the advantage of countercyclical fiscal policy to offset potential or actual booms or busts in private sector expenditure. What form fiscal stimulus or austerity might take is essentially an open question to be decided on a political basis largely extraneous to Keynesian analysis itself. Thus stimulus might take the form of measures generally favored by the political right (i.e. tax reductions favoring the higher income and business communities, subsidies to business, infrastructure supporting industrial development and other ‘trickle down’ measures) or of measures generally favored by the political left (i.e. enhanced entitlements, increased employment within the public sector, reduced taxation upon low income earners and other ‘bottom up’ measures). Likewise austerity can target high income groups (i.e. generally favored by the political left) or all persons equally without regard to ability to pay (i.e. increase premiums for public services on a flat rate basis or introduce a regressive value added tax – measures generally favored by the political right.
In post WW II US Federal politics, a striking example of how both the left and the right have each used Keynesian economic analysis is
(a) the support of the defense industry by the political right on unacknowledged Keynesian grounds (even where many of these same representatives on the political right strongly oppose the deployment of certain Keynesian measures that serve to build up the civilian public sector), and
(b) the converse opposition to the ‘military-industrial complex’ by the political left but their support for a growing civilian public sector on Keynesian grounds.
You are on sounder ground in implying that Keynesian macro-economic analysis does assume a greater role for the State than does many other schools of economic analysis often favored on the political right. Note as well, however, that over the past two hundred years or so (i.e. the period during which political forces have been analyzed using assumptions assuming that there is a ‘left’ and a ‘right’ in political life) there have been many eras during which the ‘right’ was the ‘pro-state power’ and the ‘left’ the ‘anti-state power’ faction.
In short, the various schools of economic analysis are essentially neutral in the political arena and each of these schools largely serves as talking points and intellectual fodder for political factions on either side from time to time. Arguably, this serves to give structure and order to political debate thereby enhancing the political process without thwarting or biasing the scope of debate.
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
If Krugman and other classic Keynesians were to advocate (which they clearly don’t) sustained fiscal stimulus during economically buoyant times as well as during recessions, then your fears would be amply justified. It is also true that political leaders too often during buoyant times persist with fiscal stimulus (and central banks with monetary expansion) because they benefit politically and that this both
(a) risks inflation and creation of economic bottlenecks and similar dislocations, and
(b) depletes the balance sheets of both governments and central banks thereby weakening their capacity later, when the economy weakens, to provide countercyclical support for the economy.
Arguably, the US Federal Government and the US Fed acted in the irresponsible way described above in paragraph (b) around 2003-5.
Further, it can be argued that both Japan, during the past couple of decades, and the US, since the 2008 economic meltdown deployed fiscal stimulus weakly over a protracted period and that this had the unfortunate effects of
(i) not sufficiently offsetting the private sector contraction, and
(ii) running up public debt and the notional money supply over time in ways that had sub-par effect in terms of promoting recovery and also weakened the fiscal and monetary capacity of the Government and Central Bank to address future challenges as these arise.
However, accepting all the forgoing, the fact remains that:
1. The threat of inflation during the period subsequent to the 2008 meltdown has been (and currently remains) non-existent.
2. Should the threat of damaging inflation later arise during the eventual strong recovery, this can be adequately addressed through fiscal austerity and monetary tightening at that time. (Undoubtedly, the fact described in point (ii) above may well make addressing eventual inflationary pressure during the future recovery necessarily more painful than otherwise needs be the case.)
Paul Krugman: "The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do." Ken Langone responds: Runaway deficits are the older generation "stealing" from the young, and Paul Krugman has never met a payroll and doesn't have to worry about profit margins. [View news story]
Krugman has over the years been consistent in advancing the classical Keynesian argument that fiscal expenditure should be countercyclical, that is to say: There should be public sector budgetary surpluses during periods of economic growth and public sector budgetary deficits during impending or actual recessions or depressions. The goal of such countercyclical budgeting is to offset private sector booms and busts respectively (or, better still, forestall such lurches off course) thereby keeping the economy roughly in equilibrium.
If this were 2004-5 and Krugman were advocating the running of large fiscal deficits (which he wasn’t at that time), then Langone would have been spot-on. However, in the circumstances that have been experiences in the wake of the 2008 global economic meltdown, fiscal austerity against the backdrop of private sector retrenchment clearly risks returning the economy to recession. In fact, the resulting recession could well, amongst its other ill effects, lead to greater fiscal deficits than would be incurred through timely fiscal stimulus.
Langone in this exchange is merely trying to score rhetorical points with the economically unsophisticated by talking nonsense.
What's Next For Italy? [View article]
I was thinking beyond the possibility of the centre-right holding a majority after a snap election.
Clearly Silvio Berlusconi remains the central figure within the centre-right regardless of whether he would seek the Premiership or other high office in the resulting government. It is very difficult in light of past history to assume that a Berlusconi dominated government will promote the best interests of Italy or the EU generally insofar as these are at odds with the narrow needs of his ego or for personal gain.
What's Next For Italy? [View article]
1. Is the grand coalition in question likely to have the cohesion and coherence necessary to address the many difficult economic, fiscal and social challenges that Italy now faces and cannot avoid?
2. If this coalition is a necessary short term expedient that, however, will be ineffective should, as is likely, one or more of these challenges comes to the boil, will the ground at least have been established for a further national election out of which an effective and responsive national government can emerge?
Arguably the answer to both these questions is "no" as
(a) both the centre-left and the centre-right coalitions are in internal disarray which only compounds the disarray over policies and personalities within the proposed grand coalition government,
(b) it may well follow that neither such a grand coalition government (or some subset of factions and personalities within that grand coalition) will be able to offer the Italian electorate a credible contender for effective national government when new elections are called, and
(c) consequently, Grillo's 5-Star Movement, the Northern League and other obstructionist forces (that in normal times would only play a minor and peripheral role in national politics) will continue to have sufficient support and opportunity to make future Parliaments chaotic and Italy increasingly ungovernable.
I would really appreciate learning that, in the forgoing, I am being unduly pessimistic.
Why Does Anyone Listen To Conservative Economists Anymore? [View article]
Fair enough – but-
Where does one put someone like Bruce Bartlett, clearly a political conservative in the contemporary US context, but one who deploys Keynesian economic analysis to make his case? Admittedly this was much more common during the 1940-60 period a prime example being Henry Luce of Time Magazine and much else who marshaled much time, effort and money to foster conservative economic and political causes through publications framed in Keynesian terms. Even Nixon is famously quoted in the early 1970s as saying “We’re all Keynesians now” (while, conversely, President Clinton arguably deployed Monetarist economic theories in the 1990s). Even Keynes himself in the context of severe shortages experienced in the UK during 1940-2 during the low point in WW II opposed the imposition of rationing (as an unwarranted intrusion by government in the detail of daily life) and advanced in rather strong and innovative terms based on his economic theories proposals to manage these shortages equitably and efficiently without resort to rationing.
Conversely, Ben Bernanke subscribes to libertarian political philosophy and Monetarist economic analysis yet, in the wake of the global credit crunch following the 2008 financial meltdown, he has worked hand in glove with those within the Executive Branch who see dramatic monetary easing coupled with fiscal stimulus on an unprecedented scale as the best way forward.
My only real points are that:
(a) Mass political movements tend to be ‘big tent affairs’ with ever-changing groups joining or splitting off from generation to generation (and with the fashionable ideas of the moment being supported or opposed in ever-changing array).
(b) In modern democracies there is a tendency for classes acustomed to the exercise of political and economic power to give leadership to one (or more) of these mass movements and thereby to advance their interests (and sometimes those of the broader society as well) through political parties based upon those movements.
(c) Schools of economic thought (and, arguably, of political thought as well) tend to become fodder in the political jockeying of the day. In other words, while political and economic systems of thought are important and serve those giving leadership to mass political movements and parties with potential maps for the way forward, this should not obscure the fact that other factors (emotions, perceived interests, conflicting loyalties, competitors etc.) can have equal or greater impact.
(d) In short, mass movements are as much tribal as intellectual in nature.
Why Does Anyone Listen To Conservative Economists Anymore? [View article]
The difficulty with this discussion is the lack of a common understanding of what qualifies one as a conservative economist (or, for that matter, what qualifies one as a conservative). Arguably each person knows that this confusion exists but each tends to arbitrarily apply a personal rule of thumb to decide what and who is conservative for purposes of whatever polemic debate is under way at the time.
Through much of the first half of the 19th century conservatives in the North America and Western Europe were generally thought to be those who favored a strong and intrusive central government that used the institutions of church and state to support a hereditary landed elite and established religion. By contrast, those who opposed that establishment, be they aristocrats, rich or poor, urban capitalists and professionals or urban workers, generally advocated dismantling most elements of that establishment and the state power by which it was maintained. By the end of the 19th century, the upper reaches of the middle class had gained a significant (often commanding) role within the establishment in most North America and Western Europe states but, in doing so, increasingly supported a strong central government (albeit one to support their economic interests and not a hereditary and religious establishment). This shift tended to blur what was or was not 'conservative' as this reconstituted establishment tended to be less reactionary and more open to limited reform on many issues.
This reconstituted establishment increasingly included competing regional, urban-rural, and other economic and social interests and each of these interests increasingly sought to enhance its power by enlarging the franchise to include urban and rural persons of limited means who would follow their lead. By the end of the 19th century these newly mobilized lower orders began pressing their own interests. Thus the stage was set whereby interests or classes from all strata of society increasingly sought to articulate and advance its own preferences of the moment and, for that purpose, to
(a) favour a strong role for the state in economic or social affairs insofar as the interest in question sensed that the state would advance its causes, or
(b) support a diminished role for the state insofar as the interest in question sensed that those opposed to their causes controlled the state.
The important point to note is that literally from generation to generation support for or against a strong and active central government within a class or interest can well shift dramatically. Compounding the confusion, as the opinion within an interest or class shifts, the political party within which that interest or class is strong likewise shifts to accommodate the evolving views of its supporters but often that party retains the name and outward appearance of its past. Further, there are regional, ethnic, urban-rural, religious affiliation and other dimensions to these classes or interests and their opinions (and the evolution of these opinions) rarely proceeded at the same rate or even in the same direction.
During times of social or economic stress this struggle over the merits of strong or weak government (and over control of government institutions) intensifies and new and old ideas are mobilized rather indiscriminately by each of the contending forces to buttress their side. Prominent amongst those ideas are those of the various schools of economists. It should not therefore be surprising that, for example:
1. The Austrian School arose in support of classical Liberal political reform in the economic sphere in Central Europe during the closing years of the Austro-Hungarian autocracy but, in the aftermath of the collapse of that autocracy and the rise of reactionary and revolutionary forces between the two World Wars, that School became an advocate for traditional upper middle class economic interests (i.e it started as ‘liberal’ manifestation but continued as a ‘conservative’ but not reactionary one). Arguably, in the current US context it has become the tool of reactionaries.
2. The Keynesian School arguably began as an attempt by upper middle class supporters of the fading UK Liberal Party in the 1930s to compete with rising Marxist and reactionary ideologies during the 1930s. In the immediate post WW II US and UK it evolved into several completion wings including a bland version strongly supported by many industrial leaders. With the eclipse of democratic socialist neo-Marxism and rise of neo-conservative free market ideology over the past 40 years, Keynesian arguments in opposition have been increasingly mobilized in support for a strong economic role for the state.
3. The Monetarist School arguably grew out of the more industrialist friendly wing of the Keynesian School in the 1960s by downplaying fiscal action and playing up the central bank monetary role. Coupled with Libertarian ideas, the focus became fiscal policy independent of political control and to the exclusion of a role for fiscal policy. In the face of the 2008 global economic meltdown, the role of the central banker has shifted again to become a partner with the executive arm of government in the deploying monetary and fiscal powers strongly to stabilize and refloat the economy.
In short, economics is a tool which is inherently not tied to the left or right, traditional or reformist, reactionary, progressive, or revolutionary political tendencies. It is simply a discipline around which thought can be organized (or made more obscure and confusing).
Canada - Running Out of Luck? [View article]
Even more central to the current cooling of significant sectors of the Canadian and Australian economies is the fact that continuing relatively high international demand for certain commodities, by driving up the exchange rate of domestic currencies, is making manufacturing, tourism, film production etc. less competitive (i.e. the classic 'Dutch Disease syndrome). While arguably this trend is currently more marked for Australia (see the following article from 'The Economist')
http://econ.st/178GaVN
it has been evident within Canada as well,
Given that resource extraction and export does not employ nearly as high a proportion of the domestic labour force as these negatively impacted sectors and that those sectors are dominant within the larger States of Australia and Provinces of Canada and within the larger metropolitan areas, one can clearly see why this recent shift has gained national political prominence and casts a shadow over the mood of domestic consumers and much of the electorate.
The future of Canada's proposed $3.3B Ring of Fire chromite mine looks increasingly doubtful as Cliffs Natural Resources' (CLF -1%) financial picture turns cloudier. CLF has been battered by weak iron ore prices and rising costs at its Bloom Lake project, and the site has infrastructure problems; a decision about who has surface rights to the transportation corridor is before Ontario’s mining commissioner. [View news story]
This is a perspective that all Canadian based resource development enterprises need to keep in mind.
Canada - Running Out of Luck? [View article]
I agree that there are many similarities between the economic situations of Canada and Australia at significant points of time over the past decade. Further, on the particular point you raise (i.e. "go hard and go household), arguably the monetary and fiscal authorities in both Canada and Australia saw stimulating the residential housing market and the homeowner renovation market as a way to:
(a) prevent the sort of property value and mortgage default implosion experienced in the US, UK, Ireland etc. from occurring domestically,
(b) quickly mobilize a 'shovel ready' response to threatened construction industry slowdown, and
(c) as a cumulative result of points (a) and (b), help maintain general consumer confidence and thereby general confidence in the state of the domestic economy.
As I tried to suggest in my earlier comment, this tactic was largely successful during the late 2008 to mid 2012 period in Canada and, I believe, the same can be said for Australia. In both countries the fact that
(a) the domestic monetary and fiscal situation immediately preceding the global meltdown in 2008 were strong, and
(b) export markets for key commodities remained strong
allowed monetary and fiscal resources to be diverted to support this "go hard and go household" strategy.
In retrospect, your point that similar efforts should also have been taken to rebuild public infrastructure is well taken. Arguably, the authorities in Canada and Australia, like those in the US and elsewhere, underestimated the nature, depth and duration of the recession and therefore assumed that focusing upon a 'householder' strategy would bridge a 3 or so time span until a global recovery strongly kicked in. In Canada, some efforts were made by Federal and Provincial governments to encourage and fund infrastructure work by local governments but this was largely of the road maintenance and 'build a local sports facility' variety rather than serious public infrastructure restoration. Clearly, if a much greater effort had been made to achieve public infrastructure restoration (possibly coupled with somewhat less focus upon goosing household consumer spending and indebtedness), then the Canadian and Australian economies and societies would be significantly better off than at present. That said, it is easy now to forget how pressing the need was in 2009-11 to make policy decisions quickly in complex and unprecedented circumstances. I would therefore argue that the course actually taken, while by no means perfect, was fairly good.
Canada - Running Out of Luck? [View article]
(a) commonly known facts about the current state of global markets as they impact upon many of the things Canada produces coupled with the self-evident observation that this current dip in global demand significantly reduces the rate of current Canadian economic growth, and
(b) a simplistic assertion, without supporting facts or analysis, that Canada would somehow have both prospered and avoided its current economic challenges if only the Bank of Canada had maintained unflinching monetary rectitude (and, presumably, the Federal, Provincial and local governments had maintained strict fiscal austerity) throughout the years since the 2008 global economic meltdown
than it is a reasoned discussion concerning how Canada’s monetary and fiscal authorities could have better addressed the challenges
(c) to the domestic economy in the wake of the global credit crunch following the 2008/9 meltdown, and
(d) now, in the face of a protracted state of anemic global recovery, can maintain robust domestic economic growth.
Arguably the better view is that:
1. The Canadian monetary and fiscal authorities, having managed their responsibilities with reasonable prudence during the 12 or so years preceding the 2008 global meltdown, were able to stimulate the domestic economy in the immediate post meltdown period thereby preventing the sort of deep recession occurring domestically that occurred in the US, UK etc. In this they were significantly aided by the fact that the global market for many commodities Canada produces recovered quickly and remained strong until recently.
2. There are unavoidable costs to any set of public economic policy choices and the cost over time of the monetary and fiscal stimulus mentioned in point 1 above was a growth in public and consumer debt and some degree of residential property inflation. Arguably the public and consumer debt growth would not have been materially lessened had policies of monetary and fiscal austerity been adopted (actually, this debt growth might well have been even larger had austerity reigned). By the same token, there is arguably no credible grounds upon which to argue that significantly increased unemployment and a large drop in residential property prices, both of which would have been unavoidable outcomes if domestic fiscal and monetary austerity had been the policy, would have improved the economic wellbeing of Canada, its people or the fiscal heath of Canada’s governments.
3. The protracted delay in global economic recovery and the uncertain future this portends for all nations made the long term continuance to earlier levels of domestic monetary and fiscal stimulus problematic for Canada by 2011/12 and the Canadian monetary and fiscal authorities have over the past 18 or so months been trying to tighten credit and spending moderately in a way that blunts the growth of public debt, cuts the impetus for consumers to incur unmanageable personal debt and prevents the development of bubbles and bottlenecks within the Canadian economy. This policy too has its costs as well as benefits: economic growth has slowed but recessionary pressures have been held in check.
Nothing in the forgoing is meant to suggest that execution of the described public policies might not have been better, only that:
A. The policy choices, viewed broadly, were sound for the times in question.
B. There are limits to the extent that the Canadian domestic economy can function sheltered from the unprecedented challenges of the global economy during the periods in question.
Thus, while Canada avoided the worst of the meltdown engendered global recession for four years, the fact that its economic growth has recently slowed is not a sign of some great failing of policy or execution of policy.
C. The prospect for the next couple of years is that the success or failures of the Canadian economy will follow more closely those of its trading partners and the global economy generally (possibly with some delay in effect).
Rumors of an imminent downgrade of Italy are getting no comment from Moody's, but what's really spooking markets is word the Cyprus bailout - going after uninsured depositor money - is now the EU template. Reuters' Peter Larsen notes what one week ago was a special or "one-off" case has now become the "template." Stoxx 50 is now at a session low, -1.5%, led by Italy and Spain each off near 3%. The DJIA -0.5%. [View news story]
Suppose the US Federal Government considered it necessary (i.e. for some reason, in the circumstances the economic stability of Central America, the Caribbean and even the US would be seriously impacted if there was a disordered collapse of the mini-state and its banks) to bail out some very small Caribbean nation that had a banking system essentially geared to the attraction of large amounts of illicit foreign money where that banking system was found to be essentially bankrupt and the banks within that system collectively
(a) were eightfold the size of the GNP this Caribbean nation, and
(b) essentially consisted of deposits of mafia and other unsavory elements that had parked large sums in these banks to avoid taxes otherwise owed to the US or other nations or to hide proceed of narcotic and other organized serious criminal activity (i.e. the banking system was essentially a haven for international criminal, money laundering and tax scam activity .
Clearly the options of engineering an orderly guarantee of the obligations of these banks by the government of that mini-state (i.e. as was attempted around 2008 in the case of Iceland and Ireland) or of an orderly winding up of the failed banks (as is routinely done by the US deposit insurance authority for small US insured banks) simply would not work in this situation because the scope of the banks and their crisis dwarfs the capacity of the fiscal and monetary authorities of the mini- state. Further, The US would be loathed to bail out the depositors in this situation for a whole range of legitimate reasons.
Would not both practical and policy reasons suggest that this was a unique situation that both called for and justified unorthodox measures targeting the depositors who were using the banking system for illegitimate purposes? Would it not also follow that targeting these depositors in this special situation did not constitute a precedent for targeting depositors in the legitimate banking systems in other states?
Some 40K people marched on the U.S. capital over the weekend to protest the Keystone XL (TRP) pipeline project, whose rejection could cause a deep and lasting rift with the U.S. But perhaps Canada is not such a benign trading partner, according to Huffington Post's Raymond Learsy, who says Alberta’s government has given "generous donations to Islamists with close connections to Hamas." [View news story]
http://bit.ly/XqmPMw
It appears to address most issues but is light on the environmental concerns.
Banks In The Great White North: Bank Of Montreal [View article]
I agree with the thrust of your comments.
My take on all this is that with the excessive deregulation of the banking and financial services industries in the US and UK beginning during the Thatcher and Ragan ears
(a) the distinction between merchant or investment banking, on the one hand, and commercial banking on the other increasingly disappeared, and
(b) shadow banking entities outside the purview of traditional investment banking or insurance (and therefore beyond either the self preservation conventions of those fields and the residual regulatory oversight they enjoyed) increasingly were used to do the heavy lifting of firms within banking that wished to assume greater risk that traditionally was open to them.
Add to this the growth of increasingly advanced information technology, both as a means to mobilize capital globally and to design and deploy trading strategies), and the introduction of strategies imported from games theory and the social and physical sciences to predict the chance of certain outcomes occurring and the stage was set for
(a) the illusion to arise that risk could be predicted and controlled in circumstances and ways hitherto unavailable,
(b) the allure of that illusion to increasingly override past practices with their inherent limits of exposure to risk,
(c) a massive and increasingly out of control free-for all to mushroom.
We tend now to forget that the Canadian banks also engaged in the early stages of all this, got burned but not too badly and, even so, were tempted to continue down the path that appeared to be so rewarding to banks in the UK and US. It was the Canadian Federal Government and the Bank of Canada (i.e. the regulators) that scotched these efforts. Further, when the Conservative Party attained power, they and the Canadian Banks were quite prepared to loosen these regulatory constraints (albeit with some caution) and during the run-up to 2007/8 the way was cleared for the introduction in Canada of some of the practices that later lead to grief in the UK and US. Happily for Canada, this opening to folly was largely closed as during 2006 and subsequently the prospect of serious problems in the US and UK became more apparent.
The forgoing is relevant to our discussion of the expansion of the Canadian banks through subsidiaries into traditionally non banking activities and abroad as it shows that
(a) the temptations of such institutions to engage in risky by highly profitable (until inherent problems manifest) schemes is hard for them to resist, and
(b) one should not assume that Canadian domestic rules will apply or that they themselves may not loosen.
I don’t, however, want to overstate my case. These banks are generally well run and the Canadian regulators have generally learned from the hard lesson globally of the last decade or more. I simply want to make the point that luck (i.e. Canada experienced fiscal and banking challenges during the 1990s and was able to reform and recover from this well before the global crisis) as well as good practices played major roles in Canada’s recent good fortune in fiscal and banking matters (i.e. don’t over do the wisdom and sound judgment story). Now that Canadian Banks are expanding in new and interesting ways, we need to ensure that they don’t mistakenly assume that they are inherently competent and immune from the temptations that others face in the modern world.