In looking back over this post and the ensuing comments, I realized that I’d been sloppy. I flipped back and forth between blame and cause without making distinctions. I don’t believe that you can assign blame for the financial crisis without considering fiduciary responsibility. I believe that the greatest degree of responsibility and hence blame lies with the Congress and, secondarily, with regulators, both those at the Fed and those working for the federal and state governments. Theirs is the responsibility for the system and, if the system fails, it’s their fault. Just that simple.
The behavior of bankers may have been a necessary cause of the financial crisis but they’re not responsible for the system, merely exploiting it. Their responsibilities are to their shareholders, their clients, their bosses, and their families. They do not have a primary (or, possibly, any) responsibility for the banking system. Unless there is specific wrongdoing, not just heedless profit-seeking, to my eye that takes bankers off the hook. Being arrogant and feckless is not the same as being culpable.
A similar line of reasoning applies to voters, consumers, and investors (regardless of where they live).
In my view the clear implication of this view is that attempting to spread blame as widely as possible without regard to considerations of responsibility is a distraction and, frankly, scurrilous. It’s a desperate attempt at avoiding the distinctions that are necessary for forging a prudent way ahead.
I do not believe that comparisons between countries or between cultures are useless but I do think that they need to be looked at skeptically. It requires discernment to identify what experience from another country might be applicable in your own and what would not. Different countries are simply different. Experience and preferences are different and what would be perfectly reasonable and tolerable in, say, Germany might be considered tyrannical and intolerable in the United States.
Since, unlike the United States, Britain, Ireland, Germany, France, Japan, and any number of other countries, Canada escaped the financial crisis relatively scot free, Canada forms a reasonable control for considering its causes. Why didn’t Canada have a financial crisis?
There’s a lengthy discussion of the differences between the U. S. and Canadian banking systems here. In summary, the structure and performance of financial systems are path dependent—that is, how you got to where you are now is significant. Canada’s banking system is substantially different from that of the U. S. and has been for nearly 200 years. Like Britain’s Canada’s banking system is oligopolistic and tightly regulated, a classic Fordist trade-off. By comparison the U. S. banking system is fragile, crisis-prone, and highly politically entrenched. The Canadian system did not experience a crisis in 2008. It also did not experience a crisis in 1930 or in 1907.
Canada’s system of housing finance is considerably different from that of the U. S.:
Canada has no Fannie Mae and no Freddie Mac. There is no mortgage interest tax deduction. There are no 30-year fixed-rate home loans that can be freely refinanced and prepaid. Mortgage lending is far more conservative, and Canadian mortgage lenders have a lot more recourse than American ones.
If Canadian homeowners default, their other assets and income are on the line, not just the property. Strategic defaulting is not an attractive option. There is more incentive to pay down mortgage debt because there is no tax deduction. Canadians mostly pay their mortgages electronically and automatically from their checking accounts — so extra effort must be made to actually miss a monthly payment. Canadian fixed-rate mortgages generally come with anti-refinancing prepayment penalties to protect lenders from interest rate drops, and the mortgage interest rates on these loans are fixed for a maximum of five years — an incentive to pay the debt down faster.
While these provisions aren’t so friendly for consumers, they have ensured that Canadian banks have (so far) survived the international financial crisis without requiring the taxpayer bailout. Furthermore, Canadian neighborhoods and individual homeowners have not been destroyed en masse by property bubbles burgeoning and bursting. Canada didn’t completely sidestep the recession, but home loan default rates are much lower than in the U.S., where one in 10 mortgages are in trouble.
Canada has a single consolidated financial regulator rather than the fragmented system of the U. S. The sovereignty of U. S. states is somewhat different than the sovereignty of Canada’s provinces.
Canada did not experience a housing bubble. Despite the foregoing I find the reasons for this elusive. I’m skeptical of the reasons presented for this: Canada’s system is quite similar to Britain’s and the UK did experience both a housing bubble and a financial crisis. IMO that alone is enough to rule out the superiority of Canada’s banking system as a cause of Canada’s relative financial stability, at least in the necessary and sufficient sense.
There are other differences between Canada and the U. S. and it’s hard for me to distinguish among those that are relevant and those that are irrelevant. Canada has only a handful of banks and the U. S. has on the order of 8,000. Since bureaucracy does not scale linearly that should cast at least some doubt on the applicability of the structure of Canada’s banking system to the United States. Canada’s population is a tenth that of the United States. Canada’s population has grown more slowly than that of the U. S. over the period of the last 20 years. Canada’s immigrant population tends to be more highly skilled than does that of the U. S. Are these relevant or not? I don’t know. It seems to me that a large increase in those who are relatively poor and unskilled is likely to cause political pressure for relief, particularly in housing. That in turn could introduce policies that put different stresses on the two countries.
And, then, the day ain’t over yet. Canada may yet have its own financial crisis:
Scotiabank analysts Derek Holt and Gorica Djeric note that housing prices in Canada are at all-time highs, despite the fact that Canadian household finances “are more stretched than ever before.” Within six months, Canadians will be more heavily indebted on average than Americans, who have been purging themselves of the debt that racked up before the recession. This leads Holt and Djeric to believe that the Canadian housing market will soften over the medium term.
In this post I’m not attempting to supply answers but to ask questions. Why didn’t Canada have a financial crisis? Why didn’t Canada have a housing bubble? If it’s a consequence of policy, what policies? If it’s a consequence of policies that are more like those of, say, the UK than they are like those of the U. S., why did Britain have a financial crisis and housing bubble?