Debunking the 'Too Big to Fail' Myth Once and for All [View article]
Kimball –
The trouble with overstating your position is that it plays into the lazy emotionalism of the “strangle the last hedge fund CEO with the guts of the last investment bank CEO” crowd on the far left and far right. I don’t suggest you are of that ilk, however; only letting off steam.
The real challenge will be to find the political will and the intelligence (in the US, in the UK etc.) to systematically restructure the investment banking system in a fundamental but orderly way over the next three or so years.
In short, it was too risky to attempt this over the past two years, it is now time to begin planning for this restructuring but still too risky to force fundamental change and it will be difficult in the future to find the political will for fundamental reform once the crisis is seen to be pasted. The danger, if fundamental reform does not occur, is that the global and US economies will simply be recreated as they existed in 2005 except that government debts and deficits will be much higher; a recipe for true disaster.
The focus, therefore, should not be on what should have been done over the past couple of years as this simply diverts attention from discussion of what needs to be done and the timing of these needed future actions.
Bob adamson
On Oct 15 01:36 PM Kimball Corson wrote:
> Bob, I can understand that position and felt the same way at the > time. I overstate my position here. I think the banks should have > been run thru FDIC insolvency proceedings. If actually and badly > insolvent, the bad debt of a bank would have been scraped off and > the good assets sold to new buyers to begin running a cleaned up > bank. We would have solved a big chunk of our overleveraging problem, > gotten rid of a ton of bad debt and have gotten a number of smaller > clean banks to go forward. That is just what we should now want -- > not the mega giants we now have out for themselves, engaged in much > "controlled fraud," sucking up tax payers money like crazy, defiant > of everyone, paying huge salaries and bonuses and doing the economy > no real good.
Debunking the 'Too Big to Fail' Myth Once and for All [View article]
Mr.Corson,
The only problem I have with your position is that there was too much to do and too much at stake in the summer and fall of 2008. Convince me that the collapse of these banks and investment houses would not have brought down the global banking system generally (or at least frozen global commercial credit for months on end) and I'm with you.
bob adamson
B
On Oct 15 04:30 AM Kimball Corson wrote:
> The lesson that really comes home to me solidly now is that we should > have let the mega banks and investment houses fail like we did Lehman > Brothers. Bankruptcy or an FDIC solvency proceeding turns out to > be too good for them. They are rotten and at the core of our economy.
Debunking the 'Too Big to Fail' Myth Once and for All [View article]
Thank you “Washington” for summarizing all this research so well.
“Washington” and most of you commenting on this article focus on the question of whether the big US investment banks should be broken up. Arguably the more interesting question is how and when this might best be done. Consider the following: 1. The US investment banking system was front and centre in the summer and fall of 2008. The clear and present threat was that the implosion of the key banks and their satellite hedge funds and securities firms would in short order lead to cascading collapse of US and global banking, commercial credit and economic activity. 2. The task from then until now has therefore been to stabilize the US and global credit system and economy and, given the panic and fragility of the banks and near banks, this required that the US investment banking system be sheltered and reassured in the short run. Not only was its continuation but also its active help was needed to meet unforeseen daily crises as they arose. 3. Besides the larger US and global credit and economic imperative, two other concerns must have influenced US policy makers. Only the remaining investment banks could take over the failing ones on short notice in an orderly fashion. The future of New York as the world’s prime centre of finance was at stake.
Thus, in the near term, the need was to stabilize the US investment banking system even though this entailed massive infusions of US government credit and even greater consolidation of these banks.
When the economy and credit system have regained their footing, however, is that not the time to restructure the US investment banking system? Currently the focus in that regard is on retooling the regulatory framework within which that system functions and on whether banks should continue to be able to be both commercial and investment banks. Should not that focus broaden to include question about the functions, number and size of the investment banks themselves? In a sense the issue of whether a bank should continue to be able to be both a commercial and investment bank itself raises the ‘functions, number and size’ issue.
Clearly it will be very difficult to orchestrate an orderly break up of the banks and, in doing so, to avoid the tendency to greater consolidation. Government, to avoid disruption of banking activity and political infighting, will want to move quickly and quietly when the time comes to move. One would guess that much of the preparation and execution of an orderly creation of more and smaller investment banks in place of the current concentration will take place under the guise of dividing commercial and investment functions.
The measure of the crisis that reached its low point during the first quarter of this year was not the drop in the stock markets or the failure of major investment banks in the US, UK, and Western Europe but rather the near collapse of the inter-bank and commercial credit markets precipitated by the investment bank failures. While Japan and, for different reasons, emerging economies in Asia, Russia and Latin America had suffered major recessions following stock market and bank crises, the US, UK etc had been able during the years between 1986 and 2002 recover quickly in the face of threatened banking and stock market panics. The current crisis is different in that the major mature economies were only able to stave off deflationary depression chaos at great expense to government and with great difficulty through coordinated fiscal and monetary stimulus. While this has stabilized the global economy, reflated to some extent the debt bubble and made that bubble manageable for the time being and allowed a resumption of normal patterns of business activity (major achievements in the circumstances), much work remains to be done to resolve the debt bubble and redefine the nature and scope of investment banking to better guard against a recurrence of bubble formation.
Arguably these points follow: 1. The growth of government debt over the past 15 to18 or so months was really an assumption by government of a greater share of the accumulated multi trillion debt bubble resulting from real estate, corporate debt, government debt, securitized loan debt and derivative debt practices over the past generation. The only practical short term alternative to government assuming this greater share was massive default and all the chaos and misery that would have entailed. 2. It took many years for this bubble to reach its current size and banking, corporate, consumer and government practices were fundamentally shaped over this period to accommodate this bubble formation. It therefore stands to reason that it will take several stages and several years to resolve this bubble and change those practices appropriately. 3. It is true that the current retreat from the crisis abyss remains dependent on continued government stimulus and the difficult tasks of economic reform have not yet really begun in earnest, this is more an indication of the delicacy and difficulty of the stabilization process of the past months (i.e. implosion of the banking and credit markets was too close to becoming a reality). Counterintuitive though it will seem to many, government deficits must continue through the early stages of the recover.
In short, stimulus was a necessary tool but was never a solution in isolation to the crisis. Higher taxes, more regulation, higher interest rates, slower growth and difficult and unpleasant measures to resolve the debt bubble itself (i.e. assumption and monetizing of part by governments, default of part by its holder institutions, carrying of the rest by government and corporations until paid down etc.) will all play a part at the appropriate stage. There is no quick surgical solution that avoids negative impact on savers and investors, even those whose actions did not cause the debt accumulation set the stage for the current problems.
Agreed. There is a lot of blame to go around. My point is that in working the way out from where we found ourselves in October of last year a necessary first stage was to artificially stabalize the debt bubble and economy and that the stimulus approach was the least bad of the poor options available to do this. Further, we have not yet completed that first stage and it is therefore premature to move on to further stages which, I agree, will involve significant government and private sector debt pay down (and, unavoidably and regretably, debt monetization and repudiation) at various points in the future when the economy can withstand these measures.
bob adamson
On Oct 12 07:21 PM W.E. Heasley wrote:
> Bob: > > Your points 1-5, according to John B. Taylor's book Getting Off Track > could not have occurred without the Fed first causing the bubble > via the violation of the Taylor Rule, which then lead to your points > 1-5.
Krugman's Analysis Ignores the Dynamics of Debt [View article]
Aside from an antipathy to Professor Krugman’s analysis it is not clear where Mr. Winkler is heading with his article. In rebuttal, let’s try to address two questions: (1) Was stimulus necessary and has it been beneficial, and (2) Is the US Government (and that of the UK etc.) now running up excessive debt?
Yes stimulus was necessary but stimulus alone will not be sufficient to return the US and global economies to a firm and productive foundation; a state that has not existed for a generation. For too many years prior to 2008, the stagnation in the creation of productive capacity in the traditional ‘First World’ economies was masked by overstimulation of the consumer debt and the focus of finance away from capital formation and into secularized debt and derivative pyramid creation and manipulation. Now that the resulting debt bubble threatens to implode (some may argue that this crisis is passed, but the bubble remains to be resolved), government stimulus is needed to stabilize the financial system and the larger economy to give national governments the time and capacity to begin to address the underlying structural problems in the economy. Addressing these underlying problems will be an extended, many staged and difficult process and not the simple return to growth through pump priming, on the one hand, or a short and sharp bout of creative destruction and recovery, on the other, as envisaged by too many otherwise perceptive observers on the centre left and centre right respectively. Some may argue that Krugman does not extend his analysis to the identification and description of the stages to follow after stabilization of the economy is clearly established but, too often, that criticism is merely a pretext for attack against stimulus from its inception last year; an attack that rings hollow in light of the fact that through stimulus an horrendous deflationary depression was barely averted.
What about the national debt of the US, UK etc. then? The continued growth in that debt over the past 18 or so months is the direct result of the need to address a private sector asset valuation void which became fully manifest last year. Arguably the great destruction of wealth occurred during the period 2002-2007 during which 1. the illusion of wealth was created by the inflation of real property values in the US, UK etc., 2. this illusion supported national governments of those countries in their assumption of greater unproductive national debt prior to 2008 3. the illusion was compounded by the pyramiding of secularized and derivative debt instruments on a massive scale in the private sector, 4. commodity inflation ensued and became a factor in the later stages of the growth of the debt bubble, and 5. this illusion cracked during 2008 with a multi trillion reduction in ascribed value of the debt bubble. It follows that much of the increase in US and UK national debt over the past 18 months has simply been the assumption by government of an increased share of the load for that debt bubble in order to prevent a deflationary collapse. Yes the increase in government debt has been great over the past few months but it was necessary to avoid a deflationary depression. The need to continue this stimulus continues for a number of quarters despite the cost.
Further to my earlier comments, arguably the great destruction of wealth occurred during the period 2002-2007 during which 1. the illusion of wealth was created by the inflation of real property values in the US, UK etc., 2. this illusion supported national governments of those countries in their assumption of greater unproductive national debt prior to 2008 3. the illusion was compounded by the pyramiding of secularized and derivative debt instruments on a massive scale in the private sector, 4. commodity inflation ensued and became a factor in the later stages of the growth of the debt bubble, and 5. this illusion cracked during 2008 with a multi trillion reduction in ascribed value of the debt bubble. It follows that much of the increase in US and UK national debt over the past 18 months has simply been the assumption by government of an increased share of the load for that debt bubble in order to prevent a deflationary collapse.
In short, there is little evidence of the creation of significant real wealth in the prime mature economies during the past decade and the accumulation of further government debt (counterintuitive though it appears as an isolated fact) over the past year has simply been designed to stabilize the global and national economies. Income support (both for individuals and corporations) still precedes wealth creation as Keynesian economics postulates.
It is true as Mr. Corson implies that as wealth rebuilds at later stages of the recovery a reasonable portion of it must be diverted to pay down part of the accumulated debt bubble and this wealth must be soundly based in the real economy and not an illusion. My point, however, is that wealth creation continues to flow from income (not the other way around). While it is extremely important that wealth be created and that this be done on an intelligent and solid basis, there is no escaping the fact that the deeper need is for maintenance of income and adequate consumption.
I should have added to my earlier comment the observation that Lord Keynes implies (rightly I suggest) that people will naturally save as their circumstances allow and they see warranted by their current situation. In other words, the role of public policy is not to induce people into unnatural savings patterns but rater to remove the basis for hording which will lead to the economy settling into equilibrium at less than full employment. Can’t the same be said over the longer term for individual and national wealth accumulation (i.e. good in moderation and in good time but not in a miserly mode)?
An interesting analysis Mr. Corson but one arguably focused on the interests and desires of too narrow a segment of the populations of both the mature and emerging economies.
Arguably Lord Keynes himself didn’t purport in the 1936 “General Theory” to be creating a macroeconomic theory that would be applicable for all time and circumstances; simply one to illustrate and sustain a route out of the impasse of the western democracies faced by the Great Depression, the substantial breakdown of international trade, the demise of the gold standard (a demise which he saw as overdue and intrinsically a good thing) and the rise of the totalitarian states with their autarkic command economies. In the “General Theory” he sought to (and largely succeeded in the context of the late 1930s) describe and justify a way to preserve free markets and liberal democracy by creating an enhanced role for a democratic government to prevent a national economy settling into equilibrium for an extended period at less than full employment and for the resurrection of a ‘sticky’ but workable system of international trade. Keynes’ ideas have proved to be a fertile starting point for many competing stands of thought purporting to be Keynesian and debate among these strands and between these strands and Monetarist and Austrian School strands have helped cast useful light on various economic problems that have arisen over the intervening 70 years as the global economy has changed out of all recognition to that of 1936. Have the writings of Lord Keynes lost their capacity to shed light on current economic problems (Keynes himself would be quite prepared, his public life suggests, to think afresh if circumstances warranted so why shouldn’t we?) and is Mr. Corson suggesting a firmer foundation for a modern macroeconomics?
Chap08, if I understand his position sufficiently, has the better argument in my view. I would put his case more positively and a bit differently but first should put Mr. Corson’s points in context.
Mr. Corson is right to observe (looking at North America, Western Europe, Japan and Australia etc.) that upper middle class persons (especially those beyond their 30s) of settled circumstances and having some accumulated wealth are now much more focused than before on wealth preservation than on cash flow and lifestyle issues. This change in predilection extends down the social ladder in those countries to include other groups of older citizens who are capable of increasing their savings. This is a natural reaction given the aging demographics and economic turmoil being experienced currently and it is also natural that many of these same people see their nations facing a similar challenge to that they individually face and want their national governments similarly to focus on wealth preservation.
For different reasons (because they are finally experiencing economic opportunities allowing them to save for old age and to no longer simply live from hand to mouth) large segments of the populations of South and East Asia and parts of South America are also accumulating wealth in the form of savings and taking pride in the fact that their nations are doing likewise on the international stage.
That much supports Mr. Corson’s analysis but, arguably, it is not a sufficient basis for displacing some version of the Keynesian analysis. First, a large portion of the population of both the mature and emerging economies is and will continue to plan their economic life on a cash flow basis (this is not necessarily on a short sighted and ill-considered basis although it may be for some). Think of the young, low income, elderly, those with limited opportunities etc. Second, while an orderly resolution of the private and public sector debt bubbles over time is clearly a necessary long range goal if a sound economy is to be created, the more immediate need is to prevent a deflationary depression of unprecedented proportions. Both these requirements require that that the current focus be on using the credit of the state in the form of monetary and fiscal stimulus in whatever amount needed to bridge the gap created by the collapse of value of a significant portion of the real estate, government debt, secularized debt and derivative bubble (counterintuitive though that may appear to many).
Is Canada a Low-Beta Emerging Market Play? [View article]
TraderMark’s characterization of Canada for investment purposes as a ‘Low-Beta Emerging Market Play’ is very apt and I have nothing to add on that score. The comparison to Australia is also perceptive.
As a Canadian I share the opinion oft expressed of late that Canada, because of its sound fiscal and monetary policies, a well structured, capitalized and regulated banking industry, a sound real property sector etc., has avoided the full brunt of many of the current economic problems being experiences by other mature economies and that our long term future is bright because we combine the resource base of emerging countries like Brazil with the infrastructure, educated population and political sophistication and stability of a mature democracy like Sweden. A note of caution is in order however.
While we have faired very well during the first two years of the current recession and there are several concrete signs that we are emerging from it in good order, deep global recessions of longer than two years have historically impacted Canada especially hard. Because the Canadian economy is based so heavily on international trade (especially trade with the US), with a large primary and semi-processed products component, we tend to enter such recessions late but feel the full impact and emerge late as well. Canada would thus be negatively impacted in a big way by a double dip recession.
The CAN$ has appreciated about 40% relative to the US$ over the past four years. Many of our producers and manufacturers that depend on foreign trade have been negatively impacted because their production costs are paid in CAN$ and their products sell for US$. This is reaching the point where several sectors of the Canadian economy can not remain profitable if the CAN$ appreciates further. Those sectors and further CAN$ appreciation are therefore at risk. This serves to illustrate the fact that Canada’s is not a large self contained economy. While good economic management can shield us for some time and to some degree from the negative impacts of the global economy, we can not escape those impacts.
While Canada is enjoying a renaissance in its primary products extraction and semi-processing areas and in several niche fields (the entertainment industry and Research in Motion being two cases in point), Forestry and many traditional manufacturing fields are struggling. Much of the blue collar employment and industrial base is hollowing out. Other mature economies have similar problems but this trend is particularly marked in Canada over the past decade and the recession deepens this trend significantly.
The forgoing problems are more than balanced in my opinion by the positive factors mentioned by TraderMark and the others who have commented on the article. The problems are mentioned simply to give a fuller picture.
The Great Shift: China Rising, U.S. Falling [View article]
I should have added the following to the list of observations in my earlier comments:
4. Let’s not put a wrong spin on the best means for a leading economy to compete with an emerging one. It’s not a race to the bottom in matters of living and working standards and rewards. Sure, there will be a certain amount of ‘off-shoring’ during the initial phases but ultimately the race within the emerging economy will be to raise its standards and rewards to the highest attainable levels. The trick for both sides is to avoid undercutting of reasonable standards during the transition phase.
The Great Shift: China Rising, U.S. Falling [View article]
The author and many of the commentators are raising interesting points. Arguably the only conclusions to be drawn at this point are that the nature and scope of the global society and economy are evolving rapidly in unforeseen ways, that it is too early to assume that we clearly (let alone fully) understand where this is headed and that it is therefore too soon and dangerous to draw many conclusions. Here are some tentative observations that might help keep things in perspective: 1. The US stands in a long line of nations that have held first place (or shared as contenders for first place) as global mercantile powers since the late 1600s (think Spain/Portugal, the Netherlands, France/England, UK, UK/Germany/US and US). Excluded from this list are essentially territorial empires such as Sweden around 1700 and thereafter Prussia, Austria and Russia which were important militarily and territorially but were not economically significant on a global scale. The relevance of the list in which the US stands is that while in retrospect we can see the events in history that marked the emergence of each to relative supremacy (and events that marked it being superseded by a rival), all (with the arguable exception of Portugal and perhaps Spain) continued to be important economic and social trend setters and leaders in the world as they had been before their breakthrough into notional ‘first place’. In short, being the ‘number one nation’ can be overrated (and even a burden) and, for the citizens of ‘declining’ countries, they continued to live relatively well and make valuable contributions to world civilization and didn’t necessarily find the loss of national preeminence impedes this continued relevance. This is not an argument in favour of lassitude or against reasonable striving; only for a balanced clear-headedness and against hysteria. 2. Clearly India, China and (in what the US has considered its own back yard) Brazil are rapidly rising economic and political powers. (Nigeria, Indonesia and Pakistan may have a similar liftoff in a later generation but it is much too early to speculate about these prospects.) The combination for each of India, China and Brazil of its physical size, population and resource base coupled with newfound political cohesion, modern infrastructure and modern media, information technology and economic institutions and practices makes such explosive change possible and probable. However, as others have observed, these countries face many challenges as well as opportunities and we should not assume that their rise will be smooth and uneventful. In short, just as the ‘fall’ of the US is not somehow preordained and will be not precipitous, neither will the ‘rise’ of the other large global nations. 3. Let’s not put a wrong spin on demography. While it is true, for example, that Japan is just too small geographically and by population to become even the pre-eminent East Asia power and that its aging population presents it with special challenges, it would be an ultimate dead end for it to see its salvation in somehow doubling its population by adding 20 and 30 year olds. This is not going to happen and it would have many negative social, political and ecological implications if serious attempts were made to achieve these ends. Aren’t there lessons in this for the nations of North America and Western Europe? 4. The forgoing is not the basis for arguing that the US (or each of the other major economic players) should be either complacent or, on the other hand, unduly defensive. A guarded optimism, diligence and prudence are called for by all concerned.
It arguably follows that individuals and companies seeking to do business in unaccustomed markets should show similar guarded optimism, diligence and prudence. Others have noted the opportunities and pitfalls of naivety or unrealistic optimistic or pessimistic expectations.
Asset Reflation Does Not Signal Recovery for U.S.'s Collapsed Economy [View article]
In July of 2008 the US Treasury and Fed (and their UK and other counterparts) were faced with terrible options: (a) let the interrelated secularized debt and derivative bubble, consumer and residential sector implosion and hedge fund mania based on trade of the falling dollar and rising commodity price spread play out for some unknown short further period until some unscripted event triggered a crisis, or (b) try to engineer a controlled resolution of the gigantic mess. Much blame can be laid at the feet of the investment banks and near banks, the US and UK central banks (and others to a lesser degree) and the national governments of those and other countries for allowing that mess to develop over the last decade or more but at least a bold execution of option (b) ensued. Option (a) promised either hyperinflation (if events simply staggered on without a break) or deflationary depression chaos (when an unexpected and uncontrolled crisis occurred at some later time). In short, as of the summer of 2008 there was no better option than option (b) even though it offered only limited prospects for success and was difficult to successfully execute.
Mr. Macdonald takes too narrow a view of the measures taken to stabilize the banks, credit markets and the economy since July of last year. With all the attendant flaws, the triggering of a controlled crisis in July of 2008 and the monetary and fiscal stimulus that followed across the G8 have stabilized banking, credit availability and the global economy (albeit artificially) giving the governments, central banks, financial markets and the private sector a reasonable opportunity to execute a recovery and the foundation of a more healthy economy than the one that exist now or that existed in 2005 before the crisis began to unfold. In short, the first stage was to trigger a controlled crisis; the second stage was to stabilize matters to establish a foundation from which further stages can be executed.
Mr. Macdonald would be correct if the stimulus measures were seen as the sole response to the crisis as the inflationary depression to which he refers (a replay with passion of the stagflation of the 1970s) would likely then ensue. He is also right that such a inflationary depression may result in any case if the difficult task of maintaining sufficient stimulus for a sufficient time and then to transition to appropriate later stages towards the goal of a sustained recovery are not conceived and executed adequately. The better view, however, is that the steps taken to date at least allow for the possibility that the necessary long and many staged recovery can be achieved. At least our attention now can focus on achieving the profound restructuring over an extended period that is needed rather that the alternative (thrashing about in hyperinflation or in a deflationary collapse) that otherwise faced us in short order.
Clearly the huge secularized debt and derivative bubble must be resolved over time. This will undoubtedly entail transferring it in part to governments to be monetizing or made part of national debts. In part this bubble must continue to be carried by the banks, hedge funds and near banks that hold it or be defaulted by them. The key is that all this be done in an orderly fashion over time and, to that end, the reflation to which Mr. Macdonald refers can be useful in moderation. Like stimulus, reflation is a limited tool and not the solution to our problems in and of itself.
Bearish on Banks - Why Now Is the Time to Sell [View article]
Benny D -
You observe that Canada is more ‘socialist’ than the US. As a Canadian I would put it differently. We tend to choose the middle way and are open to the adoption of measures that give a real prospect of working without undue concern where these measures fall in the right/left spectrum. We also tend at all times to look seriously at the experience of other countries.
On Oct 05 01:56 PM Benny D. wrote:
> I think that canadian banks have a little more value (TD Bank, RBC > etc.). A commenter on another post said something to the fact that > Americans look down on Canada, saying that they are socialist.<br/> > > Well I think if a little bit of socialism is what it takes to have > an efficiant banking system it wouldn't hurt to impliment it here > as sort of companion to capitalism. BD
O Canada! (Part I): Investing in the World's Soundest Banking System [View article]
Good observation. The following elaborates on that point and other matters raised by the comments of others responding to this article.
Essentially Australia, New Zealand, and Canada adopted updated versions of the traditional Scottish banking model while the US investment banking sector and the UK's (including the Royal Bank of Scotland) are updated versions of the English banking model. Both models have their merits, caution and investing for the long term being two of the Scots’.
Australia, New Zealand, and Canada each faced and met serious economic challenges in the late 1980s and 1990s. Essentially the crises in Asia, Russia and especially South America almost triggered ones for us as well because we each were relatively small economies, had high debt/GNP ratios, were dependent on foreign trade for a significant portion of our economic growth and activity and were running large annual government deficits. In short, we were each easy potential targets for hedge fund currency speculators and, unlike the US and UK, were too small to ignore the situation and its underlying causes.
Thus in the 1990s Canada went through tough streamlining of national and provincial fiscal and monetary policies and social programs; think restraint on bank expansion and amalgamation, public pension reform, balanced federal and provincial budgets, Medicare cost containment etc. When the global real estate and derivative bubble began to burst in 2006/7, Canada therefore was affected less and was better able to respond internally.
Mention should be made concerning the residential and commercial property markets in Canada because the relative strength of these markets is a significant underpinning for the banking sector. While Canadian real property values did increase significantly in the early years of this decade, this was not induced or fueled by the secularized debt or derivatives market. Attempts by the banks to move in that direction (and to further relax consumer loan security requirements) were weak, discouraged by regulators and short lived – for the most part lenders lent to borrowers with the intention of holding the mortgage or other debt instrument to maturity or to a fixed date for renegotiation of terms. Further, residential mortgage interest is not generally a borrowers’ income tax deduction item in Canada so there was less incentive for risky borrowing or lending practices. Lastly, CMHC (Canada’s federal residential insurance agency) insisted throughout that the mortgages it insured be well covered by underlying property value and that borrowers have a reasonable capacity to meet their obligations.
While Canadian banks were therefore not hit when the bubbles in the US and UK burst, they were effected when international inter-bank and commercial credit markets subsequently froze last fall. However, because the Canada’s national government had run surpluses for the previous 12 years, already through CMHC was guaranteeing most Canadian residential mortgages and those mortgages were mostly sound, the government and the banks were able to enter into a mutually beneficial arrangement. The government bought a large portion of the banks’ residential mortgage holdings with the intention to hold these to maturity (a good investment). The banks gained the liquidity to continue business as usual including the provision of ready credit on reasonable terms to commercial and consumer customers.
In short, Canada and Canadian banks have been prudent, relatively lucky and are sound and benefiting from this. A note of caution though needs to be sounded though. While we have come through the current economic downturn relatively well, Canada and therefore Canada’s banks are not immune to the global economic contraction. Given our reliance on international (particularly US) trade, we are, in fact, more exposed to the negative effects of a long term downturn than many larger economies, including that of the US. Further, the value of the CAN$ has increased around 40% relative to the US$ over the past four years and this has reduced the competitiveness of many segments of Canada’s primary and secondary industry which, in turn, impacts the banks. Further, while foreign investors have benefited on their Canadian equity holdings in the recent past because of this currency appreciation, it is doubtful whether the CAN$ will rise above parity with the US$ for any sustained period (i.e. don’t count on gains in Canadian equities being further compounded by currency appreciation because the Canadian economy can not function adequately in the near term if the CAN$ appreciates further significantly). In conclusion, Canada and its banks are generally cautious because it is obvious that they would otherwise face unmanageable problems. Sometimes being a middle sized economy has its advantages in that the nature and extent of your economic challenges are not hidden and can not be ignored.
Some have observed that Canada is more ‘socialist’ than the US. I would put it differently. We tend to choose the middle way and are open to the adoption of measures that give a real prospect of working without undue concern where these measures fall in the right/left spectrum. We also tend at all times to look seriously at the experience of other countries.
Wikipedia has a fairly good entry comparing the US and Canadian economies, including taxes, at the following link:
Offsetting the higher Canadian taxes to some extent is the fact that residents neither pay premiums (a couple of Provinces charge premiums at low rates) nor make co-payments under the Provincial basic health insurance plans. Also, Provincial Vehicle insurance plans in many Provinces provide low cost vehicle related insurance at low premiums.
On Oct 06 01:33 AM eric attias wrote:
> Come to think about it, it was probably the best way to inject liquidity > in a sound banking system yet not immune to global economic turmoil. > > > Because Canada's housing market has not gone through the bubbles > seen in other countries (the US, Spain, UK etc...), these mortgages > are not expected to default and the Canadian Taxpayer will recover > the funds in due time....
Debunking the 'Too Big to Fail' Myth Once and for All [View article]
The trouble with overstating your position is that it plays into the lazy emotionalism of the “strangle the last hedge fund CEO with the guts of the last investment bank CEO” crowd on the far left and far right. I don’t suggest you are of that ilk, however; only letting off steam.
The real challenge will be to find the political will and the intelligence (in the US, in the UK etc.) to systematically restructure the investment banking system in a fundamental but orderly way over the next three or so years.
In short, it was too risky to attempt this over the past two years, it is now time to begin planning for this restructuring but still too risky to force fundamental change and it will be difficult in the future to find the political will for fundamental reform once the crisis is seen to be pasted. The danger, if fundamental reform does not occur, is that the global and US economies will simply be recreated as they existed in 2005 except that government debts and deficits will be much higher; a recipe for true disaster.
The focus, therefore, should not be on what should have been done over the past couple of years as this simply diverts attention from discussion of what needs to be done and the timing of these needed future actions.
Bob adamson
On Oct 15 01:36 PM Kimball Corson wrote:
> Bob, I can understand that position and felt the same way at the
> time. I overstate my position here. I think the banks should have
> been run thru FDIC insolvency proceedings. If actually and badly
> insolvent, the bad debt of a bank would have been scraped off and
> the good assets sold to new buyers to begin running a cleaned up
> bank. We would have solved a big chunk of our overleveraging problem,
> gotten rid of a ton of bad debt and have gotten a number of smaller
> clean banks to go forward. That is just what we should now want --
> not the mega giants we now have out for themselves, engaged in much
> "controlled fraud," sucking up tax payers money like crazy, defiant
> of everyone, paying huge salaries and bonuses and doing the economy
> no real good.
Debunking the 'Too Big to Fail' Myth Once and for All [View article]
The only problem I have with your position is that there was too much to do and too much at stake in the summer and fall of 2008. Convince me that the collapse of these banks and investment houses would not have brought down the global banking system generally (or at least frozen global commercial credit for months on end) and I'm with you.
bob adamson
B
On Oct 15 04:30 AM Kimball Corson wrote:
> The lesson that really comes home to me solidly now is that we should
> have let the mega banks and investment houses fail like we did Lehman
> Brothers. Bankruptcy or an FDIC solvency proceeding turns out to
> be too good for them. They are rotten and at the core of our economy.
Debunking the 'Too Big to Fail' Myth Once and for All [View article]
“Washington” and most of you commenting on this article focus on the question of whether the big US investment banks should be broken up. Arguably the more interesting question is how and when this might best be done. Consider the following:
1. The US investment banking system was front and centre in the summer and fall of 2008. The clear and present threat was that the implosion of the key banks and their satellite hedge funds and securities firms would in short order lead to cascading collapse of US and global banking, commercial credit and economic activity.
2. The task from then until now has therefore been to stabilize the US and global credit system and economy and, given the panic and fragility of the banks and near banks, this required that the US investment banking system be sheltered and reassured in the short run. Not only was its continuation but also its active help was needed to meet unforeseen daily crises as they arose.
3. Besides the larger US and global credit and economic imperative, two other concerns must have influenced US policy makers. Only the remaining investment banks could take over the failing ones on short notice in an orderly fashion. The future of New York as the world’s prime centre of finance was at stake.
Thus, in the near term, the need was to stabilize the US investment banking system even though this entailed massive infusions of US government credit and even greater consolidation of these banks.
When the economy and credit system have regained their footing, however, is that not the time to restructure the US investment banking system? Currently the focus in that regard is on retooling the regulatory framework within which that system functions and on whether banks should continue to be able to be both commercial and investment banks. Should not that focus broaden to include question about the functions, number and size of the investment banks themselves? In a sense the issue of whether a bank should continue to be able to be both a commercial and investment bank itself raises the ‘functions, number and size’ issue.
Clearly it will be very difficult to orchestrate an orderly break up of the banks and, in doing so, to avoid the tendency to greater consolidation. Government, to avoid disruption of banking activity and political infighting, will want to move quickly and quietly when the time comes to move. One would guess that much of the preparation and execution of an orderly creation of more and smaller investment banks in place of the current concentration will take place under the guise of dividing commercial and investment functions.
Any thoughts?
The Government Sponsored Bubble [View article]
Arguably these points follow:
1. The growth of government debt over the past 15 to18 or so months was really an assumption by government of a greater share of the accumulated multi trillion debt bubble resulting from real estate, corporate debt, government debt, securitized loan debt and derivative debt practices over the past generation. The only practical short term alternative to government assuming this greater share was massive default and all the chaos and misery that would have entailed.
2. It took many years for this bubble to reach its current size and banking, corporate, consumer and government practices were fundamentally shaped over this period to accommodate this bubble formation. It therefore stands to reason that it will take several stages and several years to resolve this bubble and change those practices appropriately.
3. It is true that the current retreat from the crisis abyss remains dependent on continued government stimulus and the difficult tasks of economic reform have not yet really begun in earnest, this is more an indication of the delicacy and difficulty of the stabilization process of the past months (i.e. implosion of the banking and credit markets was too close to becoming a reality). Counterintuitive though it will seem to many, government deficits must continue through the early stages of the recover.
In short, stimulus was a necessary tool but was never a solution in isolation to the crisis. Higher taxes, more regulation, higher interest rates, slower growth and difficult and unpleasant measures to resolve the debt bubble itself (i.e. assumption and monetizing of part by governments, default of part by its holder institutions, carrying of the rest by government and corporations until paid down etc.) will all play a part at the appropriate stage. There is no quick surgical solution that avoids negative impact on savers and investors, even those whose actions did not cause the debt accumulation set the stage for the current problems.
Toward a New Macro Economic Theory [View article]
Agreed. There is a lot of blame to go around. My point is that in working the way out from where we found ourselves in October of last year a necessary first stage was to artificially stabalize the debt bubble and economy and that the stimulus approach was the least bad of the poor options available to do this. Further, we have not yet completed that first stage and it is therefore premature to move on to further stages which, I agree, will involve significant government and private sector debt pay down (and, unavoidably and regretably, debt monetization and repudiation) at various points in the future when the economy can withstand these measures.
bob adamson
On Oct 12 07:21 PM W.E. Heasley wrote:
> Bob:
>
> Your points 1-5, according to John B. Taylor's book Getting Off Track
> could not have occurred without the Fed first causing the bubble
> via the violation of the Taylor Rule, which then lead to your points
> 1-5.
Krugman's Analysis Ignores the Dynamics of Debt [View article]
Yes stimulus was necessary but stimulus alone will not be sufficient to return the US and global economies to a firm and productive foundation; a state that has not existed for a generation. For too many years prior to 2008, the stagnation in the creation of productive capacity in the traditional ‘First World’ economies was masked by overstimulation of the consumer debt and the focus of finance away from capital formation and into secularized debt and derivative pyramid creation and manipulation. Now that the resulting debt bubble threatens to implode (some may argue that this crisis is passed, but the bubble remains to be resolved), government stimulus is needed to stabilize the financial system and the larger economy to give national governments the time and capacity to begin to address the underlying structural problems in the economy. Addressing these underlying problems will be an extended, many staged and difficult process and not the simple return to growth through pump priming, on the one hand, or a short and sharp bout of creative destruction and recovery, on the other, as envisaged by too many otherwise perceptive observers on the centre left and centre right respectively. Some may argue that Krugman does not extend his analysis to the identification and description of the stages to follow after stabilization of the economy is clearly established but, too often, that criticism is merely a pretext for attack against stimulus from its inception last year; an attack that rings hollow in light of the fact that through stimulus an horrendous deflationary depression was barely averted.
What about the national debt of the US, UK etc. then? The continued growth in that debt over the past 18 or so months is the direct result of the need to address a private sector asset valuation void which became fully manifest last year. Arguably the great destruction of wealth occurred during the period 2002-2007 during which
1. the illusion of wealth was created by the inflation of real property values in the US, UK etc.,
2. this illusion supported national governments of those countries in their assumption of greater unproductive national debt prior to 2008
3. the illusion was compounded by the pyramiding of secularized and derivative debt instruments on a massive scale in the private sector,
4. commodity inflation ensued and became a factor in the later stages of the growth of the debt bubble, and
5. this illusion cracked during 2008 with a multi trillion reduction in ascribed value of the debt bubble.
It follows that much of the increase in US and UK national debt over the past 18 months has simply been the assumption by government of an increased share of the load for that debt bubble in order to prevent a deflationary collapse. Yes the increase in government debt has been great over the past few months but it was necessary to avoid a deflationary depression. The need to continue this stimulus continues for a number of quarters despite the cost.
Toward a New Macro Economic Theory [View article]
1. the illusion of wealth was created by the inflation of real property values in the US, UK etc.,
2. this illusion supported national governments of those countries in their assumption of greater unproductive national debt prior to 2008
3. the illusion was compounded by the pyramiding of secularized and derivative debt instruments on a massive scale in the private sector,
4. commodity inflation ensued and became a factor in the later stages of the growth of the debt bubble, and
5. this illusion cracked during 2008 with a multi trillion reduction in ascribed value of the debt bubble.
It follows that much of the increase in US and UK national debt over the past 18 months has simply been the assumption by government of an increased share of the load for that debt bubble in order to prevent a deflationary collapse.
In short, there is little evidence of the creation of significant real wealth in the prime mature economies during the past decade and the accumulation of further government debt (counterintuitive though it appears as an isolated fact) over the past year has simply been designed to stabilize the global and national economies. Income support (both for individuals and corporations) still precedes wealth creation as Keynesian economics postulates.
It is true as Mr. Corson implies that as wealth rebuilds at later stages of the recovery a reasonable portion of it must be diverted to pay down part of the accumulated debt bubble and this wealth must be soundly based in the real economy and not an illusion.
My point, however, is that wealth creation continues to flow from income (not the other way around). While it is extremely important that wealth be created and that this be done on an intelligent and solid basis, there is no escaping the fact that the deeper need is for maintenance of income and adequate consumption.
Toward a New Macro Economic Theory [View article]
Toward a New Macro Economic Theory [View article]
Arguably Lord Keynes himself didn’t purport in the 1936 “General Theory” to be creating a macroeconomic theory that would be applicable for all time and circumstances; simply one to illustrate and sustain a route out of the impasse of the western democracies faced by the Great Depression, the substantial breakdown of international trade, the demise of the gold standard (a demise which he saw as overdue and intrinsically a good thing) and the rise of the totalitarian states with their autarkic command economies. In the “General Theory” he sought to (and largely succeeded in the context of the late 1930s) describe and justify a way to preserve free markets and liberal democracy by creating an enhanced role for a democratic government to prevent a national economy settling into equilibrium for an extended period at less than full employment and for the resurrection of a ‘sticky’ but workable system of international trade. Keynes’ ideas have proved to be a fertile starting point for many competing stands of thought purporting to be Keynesian and debate among these strands and between these strands and Monetarist and Austrian School strands have helped cast useful light on various economic problems that have arisen over the intervening 70 years as the global economy has changed out of all recognition to that of 1936. Have the writings of Lord Keynes lost their capacity to shed light on current economic problems (Keynes himself would be quite prepared, his public life suggests, to think afresh if circumstances warranted so why shouldn’t we?) and is Mr. Corson suggesting a firmer foundation for a modern macroeconomics?
Chap08, if I understand his position sufficiently, has the better argument in my view. I would put his case more positively and a bit differently but first should put Mr. Corson’s points in context.
Mr. Corson is right to observe (looking at North America, Western Europe, Japan and Australia etc.) that upper middle class persons (especially those beyond their 30s) of settled circumstances and having some accumulated wealth are now much more focused than before on wealth preservation than on cash flow and lifestyle issues. This change in predilection extends down the social ladder in those countries to include other groups of older citizens who are capable of increasing their savings. This is a natural reaction given the aging demographics and economic turmoil being experienced currently and it is also natural that many of these same people see their nations facing a similar challenge to that they individually face and want their national governments similarly to focus on wealth preservation.
For different reasons (because they are finally experiencing economic opportunities allowing them to save for old age and to no longer simply live from hand to mouth) large segments of the populations of South and East Asia and parts of South America are also accumulating wealth in the form of savings and taking pride in the fact that their nations are doing likewise on the international stage.
That much supports Mr. Corson’s analysis but, arguably, it is not a sufficient basis for displacing some version of the Keynesian analysis. First, a large portion of the population of both the mature and emerging economies is and will continue to plan their economic life on a cash flow basis (this is not necessarily on a short sighted and ill-considered basis although it may be for some). Think of the young, low income, elderly, those with limited opportunities etc. Second, while an orderly resolution of the private and public sector debt bubbles over time is clearly a necessary long range goal if a sound economy is to be created, the more immediate need is to prevent a deflationary depression of unprecedented proportions. Both these requirements require that that the current focus be on using the credit of the state in the form of monetary and fiscal stimulus in whatever amount needed to bridge the gap created by the collapse of value of a significant portion of the real estate, government debt, secularized debt and derivative bubble (counterintuitive though that may appear to many).
Is Canada a Low-Beta Emerging Market Play? [View article]
As a Canadian I share the opinion oft expressed of late that Canada, because of its sound fiscal and monetary policies, a well structured, capitalized and regulated banking industry, a sound real property sector etc., has avoided the full brunt of many of the current economic problems being experiences by other mature economies and that our long term future is bright because we combine the resource base of emerging countries like Brazil with the infrastructure, educated population and political sophistication and stability of a mature democracy like Sweden. A note of caution is in order however.
While we have faired very well during the first two years of the current recession and there are several concrete signs that we are emerging from it in good order, deep global recessions of longer than two years have historically impacted Canada especially hard. Because the Canadian economy is based so heavily on international trade (especially trade with the US), with a large primary and semi-processed products component, we tend to enter such recessions late but feel the full impact and emerge late as well. Canada would thus be negatively impacted in a big way by a double dip recession.
The CAN$ has appreciated about 40% relative to the US$ over the past four years. Many of our producers and manufacturers that depend on foreign trade have been negatively impacted because their production costs are paid in CAN$ and their products sell for US$. This is reaching the point where several sectors of the Canadian economy can not remain profitable if the CAN$ appreciates further. Those sectors and further CAN$ appreciation are therefore at risk. This serves to illustrate the fact that Canada’s is not a large self contained economy. While good economic management can shield us for some time and to some degree from the negative impacts of the global economy, we can not escape those impacts.
While Canada is enjoying a renaissance in its primary products extraction and semi-processing areas and in several niche fields (the entertainment industry and Research in Motion being two cases in point), Forestry and many traditional manufacturing fields are struggling. Much of the blue collar employment and industrial base is hollowing out. Other mature economies have similar problems but this trend is particularly marked in Canada over the past decade and the recession deepens this trend significantly.
The forgoing problems are more than balanced in my opinion by the positive factors mentioned by TraderMark and the others who have commented on the article. The problems are mentioned simply to give a fuller picture.
The Great Shift: China Rising, U.S. Falling [View article]
4. Let’s not put a wrong spin on the best means for a leading economy to compete with an emerging one. It’s not a race to the bottom in matters of living and working standards and rewards. Sure, there will be a certain amount of ‘off-shoring’ during the initial phases but ultimately the race within the emerging economy will be to raise its standards and rewards to the highest attainable levels. The trick for both sides is to avoid undercutting of reasonable standards during the transition phase.
The Great Shift: China Rising, U.S. Falling [View article]
1. The US stands in a long line of nations that have held first place (or shared as contenders for first place) as global mercantile powers since the late 1600s (think Spain/Portugal, the Netherlands, France/England, UK, UK/Germany/US and US). Excluded from this list are essentially territorial empires such as Sweden around 1700 and thereafter Prussia, Austria and Russia which were important militarily and territorially but were not economically significant on a global scale. The relevance of the list in which the US stands is that while in retrospect we can see the events in history that marked the emergence of each to relative supremacy (and events that marked it being superseded by a rival), all (with the arguable exception of Portugal and perhaps Spain) continued to be important economic and social trend setters and leaders in the world as they had been before their breakthrough into notional ‘first place’. In short, being the ‘number one nation’ can be overrated (and even a burden) and, for the citizens of ‘declining’ countries, they continued to live relatively well and make valuable contributions to world civilization and didn’t necessarily find the loss of national preeminence impedes this continued relevance. This is not an argument in favour of lassitude or against reasonable striving; only for a balanced clear-headedness and against hysteria.
2. Clearly India, China and (in what the US has considered its own back yard) Brazil are rapidly rising economic and political powers. (Nigeria, Indonesia and Pakistan may have a similar liftoff in a later generation but it is much too early to speculate about these prospects.) The combination for each of India, China and Brazil of its physical size, population and resource base coupled with newfound political cohesion, modern infrastructure and modern media, information technology and economic institutions and practices makes such explosive change possible and probable. However, as others have observed, these countries face many challenges as well as opportunities and we should not assume that their rise will be smooth and uneventful. In short, just as the ‘fall’ of the US is not somehow preordained and will be not precipitous, neither will the ‘rise’ of the other large global nations.
3. Let’s not put a wrong spin on demography. While it is true, for example, that Japan is just too small geographically and by population to become even the pre-eminent East Asia power and that its aging population presents it with special challenges, it would be an ultimate dead end for it to see its salvation in somehow doubling its population by adding 20 and 30 year olds. This is not going to happen and it would have many negative social, political and ecological implications if serious attempts were made to achieve these ends. Aren’t there lessons in this for the nations of North America and Western Europe?
4. The forgoing is not the basis for arguing that the US (or each of the other major economic players) should be either complacent or, on the other hand, unduly defensive. A guarded optimism, diligence and prudence are called for by all concerned.
It arguably follows that individuals and companies seeking to do business in unaccustomed markets should show similar guarded optimism, diligence and prudence. Others have noted the opportunities and pitfalls of naivety or unrealistic optimistic or pessimistic expectations.
Asset Reflation Does Not Signal Recovery for U.S.'s Collapsed Economy [View article]
Mr. Macdonald takes too narrow a view of the measures taken to stabilize the banks, credit markets and the economy since July of last year. With all the attendant flaws, the triggering of a controlled crisis in July of 2008 and the monetary and fiscal stimulus that followed across the G8 have stabilized banking, credit availability and the global economy (albeit artificially) giving the governments, central banks, financial markets and the private sector a reasonable opportunity to execute a recovery and the foundation of a more healthy economy than the one that exist now or that existed in 2005 before the crisis began to unfold. In short, the first stage was to trigger a controlled crisis; the second stage was to stabilize matters to establish a foundation from which further stages can be executed.
Mr. Macdonald would be correct if the stimulus measures were seen as the sole response to the crisis as the inflationary depression to which he refers (a replay with passion of the stagflation of the 1970s) would likely then ensue. He is also right that such a inflationary depression may result in any case if the difficult task of maintaining sufficient stimulus for a sufficient time and then to transition to appropriate later stages towards the goal of a sustained recovery are not conceived and executed adequately. The better view, however, is that the steps taken to date at least allow for the possibility that the necessary long and many staged recovery can be achieved. At least our attention now can focus on achieving the profound restructuring over an extended period that is needed rather that the alternative (thrashing about in hyperinflation or in a deflationary collapse) that otherwise faced us in short order.
Clearly the huge secularized debt and derivative bubble must be resolved over time. This will undoubtedly entail transferring it in part to governments to be monetizing or made part of national debts. In part this bubble must continue to be carried by the banks, hedge funds and near banks that hold it or be defaulted by them. The key is that all this be done in an orderly fashion over time and, to that end, the reflation to which Mr. Macdonald refers can be useful in moderation. Like stimulus, reflation is a limited tool and not the solution to our problems in and of itself.
Bearish on Banks - Why Now Is the Time to Sell [View article]
You observe that Canada is more ‘socialist’ than the US. As a Canadian I would put it differently. We tend to choose the middle way and are open to the adoption of measures that give a real prospect of working without undue concern where these measures fall in the right/left spectrum. We also tend at all times to look seriously at the experience of other countries.
On Oct 05 01:56 PM Benny D. wrote:
> I think that canadian banks have a little more value (TD Bank, RBC
> etc.). A commenter on another post said something to the fact that
> Americans look down on Canada, saying that they are socialist.<br/>
>
> Well I think if a little bit of socialism is what it takes to have
> an efficiant banking system it wouldn't hurt to impliment it here
> as sort of companion to capitalism. BD
O Canada! (Part I): Investing in the World's Soundest Banking System [View article]
Essentially Australia, New Zealand, and Canada adopted updated versions of the traditional Scottish banking model while the US investment banking sector and the UK's (including the Royal Bank of Scotland) are updated versions of the English banking model. Both models have their merits, caution and investing for the long term being two of the Scots’.
Australia, New Zealand, and Canada each faced and met serious economic challenges in the late 1980s and 1990s. Essentially the crises in Asia, Russia and especially South America almost triggered ones for us as well because we each were relatively small economies, had high debt/GNP ratios, were dependent on foreign trade for a significant portion of our economic growth and activity and were running large annual government deficits. In short, we were each easy potential targets for hedge fund currency speculators and, unlike the US and UK, were too small to ignore the situation and its underlying causes.
Thus in the 1990s Canada went through tough streamlining of national and provincial fiscal and monetary policies and social programs; think restraint on bank expansion and amalgamation, public pension reform, balanced federal and provincial budgets, Medicare cost containment etc. When the global real estate and derivative bubble began to burst in 2006/7, Canada therefore was affected less and was better able to respond internally.
Mention should be made concerning the residential and commercial property markets in Canada because the relative strength of these markets is a significant underpinning for the banking sector. While Canadian real property values did increase significantly in the early years of this decade, this was not induced or fueled by the secularized debt or derivatives market. Attempts by the banks to move in that direction (and to further relax consumer loan security requirements) were weak, discouraged by regulators and short lived – for the most part lenders lent to borrowers with the intention of holding the mortgage or other debt instrument to maturity or to a fixed date for renegotiation of terms. Further, residential mortgage interest is not generally a borrowers’ income tax deduction item in Canada so there was less incentive for risky borrowing or lending practices. Lastly, CMHC (Canada’s federal residential insurance agency) insisted throughout that the mortgages it insured be well covered by underlying property value and that borrowers have a reasonable capacity to meet their obligations.
While Canadian banks were therefore not hit when the bubbles in the US and UK burst, they were effected when international inter-bank and commercial credit markets subsequently froze last fall. However, because the Canada’s national government had run surpluses for the previous 12 years, already through CMHC was guaranteeing most Canadian residential mortgages and those mortgages were mostly sound, the government and the banks were able to enter into a mutually beneficial arrangement. The government bought a large portion of the banks’ residential mortgage holdings with the intention to hold these to maturity (a good investment). The banks gained the liquidity to continue business as usual including the provision of ready credit on reasonable terms to commercial and consumer customers.
In short, Canada and Canadian banks have been prudent, relatively lucky and are sound and benefiting from this. A note of caution though needs to be sounded though. While we have come through the current economic downturn relatively well, Canada and therefore Canada’s banks are not immune to the global economic contraction. Given our reliance on international (particularly US) trade, we are, in fact, more exposed to the negative effects of a long term downturn than many larger economies, including that of the US. Further, the value of the CAN$ has increased around 40% relative to the US$ over the past four years and this has reduced the competitiveness of many segments of Canada’s primary and secondary industry which, in turn, impacts the banks. Further, while foreign investors have benefited on their Canadian equity holdings in the recent past because of this currency appreciation, it is doubtful whether the CAN$ will rise above parity with the US$ for any sustained period (i.e. don’t count on gains in Canadian equities being further compounded by currency appreciation because the Canadian economy can not function adequately in the near term if the CAN$ appreciates further significantly). In conclusion, Canada and its banks are generally cautious because it is obvious that they would otherwise face unmanageable problems. Sometimes being a middle sized economy has its advantages in that the nature and extent of your economic challenges are not hidden and can not be ignored.
Some have observed that Canada is more ‘socialist’ than the US. I would put it differently. We tend to choose the middle way and are open to the adoption of measures that give a real prospect of working without undue concern where these measures fall in the right/left spectrum. We also tend at all times to look seriously at the experience of other countries.
Wikipedia has a fairly good entry comparing the US and Canadian economies, including taxes, at the following link:
en.wikipedia.org/wiki/...
Offsetting the higher Canadian taxes to some extent is the fact that residents neither pay premiums (a couple of Provinces charge premiums at low rates) nor make co-payments under the Provincial basic health insurance plans. Also, Provincial Vehicle insurance plans in many Provinces provide low cost vehicle related insurance at low premiums.
On Oct 06 01:33 AM eric attias wrote:
> Come to think about it, it was probably the best way to inject liquidity
> in a sound banking system yet not immune to global economic turmoil.
>
>
> Because Canada's housing market has not gone through the bubbles
> seen in other countries (the US, Spain, UK etc...), these mortgages
> are not expected to default and the Canadian Taxpayer will recover
> the funds in due time....