Why Didn’t Canada Have a Financial Crisis?

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?

76 comments… add one
  • john personna

    Your question was remarkably easy to answer, Dave.

    Lending standards:

    During the period 2001-2007, many lenders began offering loans of increasing multiples of income[9] sometimes to people with poor credit ratings; products that did not require a deposit became more common- 125% mortgage products appeared.

    As I say to michael, in the other thread, in response to his general attack on economics, the field is strongest as narrative history.

    And one of the ways to weaken it is to wave away inconvenient facts.

  • john personna

    BTW, as a note to Michael [ed. corrected per comment farther down], the nice thing about economics as narrative history is that it doesn’t depend on “homo economicus” conceits. It works with humans as they are, with economic natures and less economic motivations rolled into … our confused selves.

  • PD Shaw

    Interesting issue. It seems though that if one focuses on the housing bubble, one can just as easily ask why not Texas, or any number of states?

    I believe historically, real estate bubbles were associated with speculative booms in specific areas. Is it possible that Canada lacks the right climate?

  • john personna

    This was a world-wide boom and bust PD. It varied in degree only.

    Even Texas had a small swell and fall. Reasons? Texas exemplified the “flat land” scenario, where builders could expand outward with increase in population. There was much less “must get it before someone else does” thinking.

  • john personna

    Good lord who spell-corrected “michael” to “Mubarak?”

    That’s funny.

  • john personna

    Perhaps also, having lived through some past real estate crashes, Texas buyers had a “once-burned” attitude going it.

  • I was a bit puzzled by that comment. Pursuant to your follow-up I’ve corrected it.

  • Drew

    As a former lender, and user of credit as an integral part of my business for 15 years, I will tell you unequivocally that the credit cuture of Canadian banks is an order of magnitude more conservative than US lenders. And they didn’t have bad mortgage origination mandates stuffed down their throats.

  • john personna

    “And they didn’t have bad mortgage origination mandates stuffed down their throats.”

    You understand that the president’s Financial Crisis Inquiry Commission called BS on this? And that reputable commentators concur?

    Now it’s left to internet trolls to believe otherwise, anyway.

  • john personna

    BTW, I dislike Freddie and Fannie and the CRA and would wind them all down out of general principles.

    BUT, I also think only crazed wingers think they drove the last credit/RE crisis. They think that because it distracts them from regulation and the decline of lending standards that occurred across the board.

    SO, if you want to convince me otherwise, find someone who is sanely moderate, who is not a crazed winger, who believes that “bad mortgage origination mandates [were] stuffed down [industry] throats”

  • PD Shaw

    Canada historically was somewhat of an economic outlier from other Commonwealth countries, which moved pretty lockstep with the Mother Country from mercantilism to free trade. The fear was that free trade would move Canada into the U.S. sphere of control, so fiscal and economic policy, as well as infrastructure were designed to promote the flow of goods and capital to the coasts and away from the U.S.

    I’m sure NAFTA and globalization have eroded these impediments, but I’ve always assumed that to be Canadian at least partly meant having a non-U.S. identity. And this may offer some explanation of why Britain, but not Canada.

  • michael reynolds

    Dave says:

    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.

    The Dave quotes:

    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.

    Then Drew comments:

    I will tell you unequivocally that the credit cuture of Canadian banks is an order of magnitude more conservative than US lenders.

    We accept as natural and normal that bankers should not have responsibility for the system as a whole, but be motivated simply by greed.

    It seems the Canadians take a different view, one in which bankers appear to believe the integrity of their profession matters. It seems they did not send their lobbyists to Ottawa to demand the freedom to pursue ever greater profits and take ever greater risks at the expense of their professional responsibilities as bankers. Not as businessmen, but as bankers..

    Maybe it’s a cultural difference after all, and perhaps the Canadians were saved by a modesty and sense of proportion and integrity that absolutely escapes Americans and Brits who fail to understand that capitalism requires virtue.

    (Incidentally, I am not now, and have never been the dictator of Egypt.)

  • PD Shaw

    I think this chart on Canadian real estate trends is interesting:

    http://chpc.biz/Major_Cities_Chart.htm

    Key graph: “in Vancouver, you need 3.2 average wage earners to make the payments on an 80% of sale price, 5 year fixed rate first mortgage.”

    Maybe Canada has it’s own hot spots that should be looked at separately.

  • Drew

    “You understand that the president’s Financial Crisis Inquiry Commission called BS on this? And that reputable commentators concur?”

    You do understand that I do not, like you, live my life by regurgitating the views of supposed “authorities.” Rather, I have lived my life, have been extremely professionally successful, and have become wealthy, by making my own independant judgments, based on training, logic and experience in the real world.

    You are free to continue to spout those supposed authorities without an original thought in you head, and amuse us. After all, its America.

  • Drew

    “BUT, I also think only crazed wingers think they drove the last credit/RE crisis. They think that because it distracts them from regulation and the decline of lending standards that occurred across the board.”

    Across the board? You then need to explain why greed, decline in lending standards and regulation applied only to housing related assets. There is absolutely no reason that similar origination and syndication activities would not be similarly corrupt, or corrupted, in the sub-prime auto, general obligation, appliance or other time financed asset categories. Are we to believe that greedy originators and syndicators, and incompetant credit analysts, only gravitate towards housing??? Only if you are on smack. The difference is obvious. There was an electromotive force, public policy, to and including Freddie and Fannie, behind the asset called housing. This drove bad policy and activity.

    If memory serves correctly, the PE arm of my former lending institution did a quite successful deal in the general sub-prime lending arena. No housing; no melt down.

    But what do I know, I only come from the business, but you read academic papers. You must be correct.

  • michael reynolds

    But what do I know, I only come from the business, but you read academic papers. You must be correct.

    I love this quote from Drew, because it essentially puts him my side in asserting that economics is not a science, but something closer to theology.

    Imagine the same statement relating to physics. “I don’t know what you physicists get from your academic papers, but in my world objects in motion remain in motion unless acted upon.”

  • Incidentally, I am not now, and have never been the dictator of Egypt

    I’m not so sure. Has anybody here seen both Michael and Mubarak together?

  • Drew

    Mubareck, er, Michael –

    At least your observation is based in some debatable postulate – even if incorrect – as opposed to jp’s gibberish.

    “We accept as natural and normal that bankers should not have responsibility for the system as a whole, but be motivated simply by greed.”

    Not really. We observe that everyone pursues self interest. Your sole invocation of bankers is a convenient fiction in your head. The entire universe of participants who pursued the vast majority of activities in these mortgages were inspired by greed and envy. Cheap credit; rising home values. EZ profit. Let’s get real people.

    How many examples must I post outside of the housing crisis? Day traders? “Insider tip” stock buyers? After Christmas shoppers? The 4AM Wal-Mart crowd? The internet car shopper/pit two dealers against each other crowd? Lotto ticket buyers? Coupon clippers. And on it goes. Everyone is looking for a good price, a profit opportunity, an angle……………greed, or self interest. Invoking just bankers is juvenile populist claptrap.

    “It seems the Canadians take a different view, one in which bankers appear to believe the integrity of their profession matters. It seems they did not send their lobbyists to Ottawa to demand the freedom to pursue ever greater profits and take ever greater risks at the expense of their professional responsibilities as bankers. Not as businessmen, but as bankers.”

    Sorry to burst your idealistic, child-like and romantic bubble. They simply are steely eyed credit analysts. I’ve long understood that commentors on this board have no clue about the risk-reward dynamics of the various participants and levels in a cap structure, and I’m not going to conduct a remedial Finance 101 lesson for the jp’s and MR’s of the world right now. Let me just say that lender’s economics cannot withstand losses, without subsidy. (As opposed to junor securities) Unlike the US, the Canadians have no subsidy. Hence, they maintain credit standards out of naked self interest. (My firm currently has very close ties with two very prominent Canadian institutions. I know, firs hand, of what I speak.)

    So sorry, MR, but take your SpongeBob SquarePants level dissertation on “virtue” and dump it into the heap of, hopefully, just temporary brain cramp. but more likely publicly exposed and embarrassing profound naivete.

    Now grab a good Scotch, ponder, and try to come to grips with the world as it is, not as you want it to be. We would all agree on your goal, its just that we will get killed in the interim.

  • Drew

    “I love this quote from Drew, because it essentially puts him my side in asserting that economics is not a science, but something closer to theology.”

    I’m not so sure, Michael, much as you want it to be so.

    Economics is different from business. I’ve never seen an economist that I respect deny that people act in their own self interest. The great Milton Friedman said so explicitly. He simply observed that the notion of a free market with all participants acting so – but protected from illegal incursions bt government – was a better, if not perfect result than central (government) mandate. The empirical evidence seems to be overwhelmingly in his favor.

    Further, business practice does not equal economics. To post so is bizarre.

    BTW – a central theme of yours seems to be irrational behavior, and tangentially the EMH. I don’t think you understand the EMH. EMH simply states that information is disseminated so quickly that market participants process it and reflect it in prices. It does not follow that a) the information is correct, b) the information is rationally interpreted and reflected. Its on those imperfections where money can be made. But the fraction of those who can actually do this is very small.

    One of my mentors, Eugene Fama, makes this case very completely and eloquently in a piece published within the last two years if you care to search. He’s a serious academic worth reading, rather than the Keystone Cops list that apparently makes up jp’s reading list.

  • michael reynolds

    Drew:

    Just got some steely-eyed businessmen to give me low seven figures. You know why? Yes, because they hope for profit. But there are a lot of safer ways to make a profit. The reason they do business with me is because they want to be part of something important.

    In a couple weeks we go talk to sponsors, and they too will want to make a profit. But they too will want to puff out their chests and think, “Hey, this is cool, this is new, and I’m part of it.”

    And why am I in the deal? I’m working myself half to death and there are easier ways to make money for me. I’m in for profit, but just as importantly, because if it works then I am the prophet of publishing and all will have to bow before me.

    It’s never just about money. And “steely-eyed, emotionless,” anything doesn’t exist. That’s the fantasy. It’s a cliche of lazy Hollywood writers and it doesn’t exist in reality. It always goes back to character, always will, and characters never, ever have a single motivation.

  • michael reynolds

    That’s a study someone should do, or maybe has done, by the way: how have Hollywood tropes affected the self-image of individuals. The “emotionless, ruthlessly-focused male” was invented in the 1960’s with the spaghetti westerns, I suspect. The Duke was never that kind of character. That notion gained traction with Clint Eastwood and Charles Bronson.

    I’d be willing to bet that a huge number of men who had their formative experiences in the 60’s and 70’s latched onto this archetype. It’s been quite persistent I’d say in lit and movies, but sort of traveled down the food chain, becoming increasingly eye-rolling.

    The new archetype is the Seth Rogan type. We’ll see more and more guys patterning themselves after that kind of character. It’ll be a long couple of decades.

  • sam

    ” The “emotionless, ruthlessly-focused male” was invented in the 1960’s with the spaghetti westerns, I suspect. ”

    I dunno. See, e.g., Kirk Douglas in The Bad and the Beautiful (1952). Interestingly, that film was about Hollywood — an industry ruled, until the demise of the studio system, by probably the most ruthlessly-focused, but highly emotional, group of male homo sapiens to walk the earth since the Borgias.

  • michael reynolds

    sam:

    Oh there were definitely earlier expressions of the type. But I think it rose to the status of a Hollywood go-to later with the iconic Clint. I suspect it had to do with the new role of women. The character type has an air of defensiveness about it, an armored emotionlessness that denies a capacity to cope and substitutes instead a blank emptiness, almost a catatonia.

    The Duke, Bogie, Alan Ladd, they all expressed emotion, had feelings, and understood ambiguity. Clint and Bronson and that other guy whose name I forget and I’m too lazy to look up, all typified the new, unemotional, male. The male lead as almost a stick figure. Brittle.

    Then came the brooding phase: Pacino, DeNiro on through DiCaprio. And now we’re well into the boy-man thing.

    So, for those following along at home, that’d be complex man, comatose man, brooding man, and boy-man.

  • sam

    We getting OT, but

    “But I think it rose to the status of a Hollywood go-to later with the iconic Clint. ”

    You might have something there. A Fistful of Dollars is based on Kurosawa’s Yojimbo, which itself was based on Dashiell Hammett’s Red Harvest. The “hero” of that book has no name, he’s just the Continental Op, he’s faceless, really. In Red Harvest he comes to this corrupt town and succeeds in cleaning it up by getting the rival gangs to bump each other off. I can’t recall that he expressed anything in the way of emotion as he set about the cleansing. Clint’s turn as the Man with No Name was pretty much the Continental Op in a serape.

  • john personna

    FWIW, I thought my offer to learn from some sane and moderate voice who believed the CRA connection was a fair one. It would be a stretch for me, given my starting place, but I’d genuinely try.

    Also FWIW, I think Barry Ritholtz is actually a sane and moderate voice on this. He loves the market. It is his bread and butter. He hates bailouts. He wrote a book about that.

    The only reason we’re asked to believe Ritholtz is a crazed liberal is that he won’t buy into the CRA BS and etc.

  • john personna

    BTW, I think michael is correct that we have … let’s face it, a dysfunction.

    I called it an immune response recently. Same thing. When someone says our banks should be well behaved … that’s socialism.

  • Dave,

    I think that your post is asking the right questions and it engages in ways that professional analysis lacks. This suggests to me that professional analysis is simply unwilling to ask some big questions, the answers to which might suggest reforms that go beyond surface level policy tinkering. To my view, if we want to develop understanding then we can’t keep some topics off the table for this results in not really understanding the problem and thus any solutions that are developed will result in only half-fixes.

    Canada has a single consolidated financial regulator rather than the fragmented system of the U. S.

    You’d think that this would make it easier for banks to achieve regulatory capture but it seems that this is not what has happened. It would be interesting to compare the revolving door between the Canadian and American systems and see if there is identical movement between the respective banking and regulatory systems.

    IIRC, the Canadian regulators, or maybe it was the political leadership, put a stop to some bank mergers in the last decade or so. Full stop, not conditional stop.
    Canada may yet have its own financial crisis:

    I could believe this. Canada, like most other Western countries, also has ever-more intrusive zoning laws which are adding significant price inflation to new home construction. They also have cost shifted municipal development from being sourced from property tax revenue to having a strong reliance on developer fees. The point is that in much of the West a good portion of the increase in housing costs is coming from government originated meddling in the real estate market. What this means is that real estate pricing has been somewhat decoupled from a supply-demand model and from house prices being tied to a income-multiple factor.

    Secondly, I’ve read reports that the principal boosters of Canada’s policy of maintaining high immigration levels is the Canadian real estate development industry. They want a growing population so that there is always new construction going on. I’m not sure how economically rational that policy is for Canada but what is clear is that it has more effect on the demand side of the real estate market than on the supply side and that’s going to work to boost prices.

    It would be interesting to compare the renter-house price multiple in Canadian markets against the US markets. One of the signs of a bubble is when a real estate investor can’t raise rents and yet house prices keep increasing. That happened in the many overheated US markets but I’m not sure what is happening in Canada. There are some Canadian markets where this is indeed happening, Vancouver being one in that they see plenty of overseas buyers picking up condo units as investments and developments used to sell out quickly.

    I concur with the analyst that the Canadian market is likely to suffer a correction of some sort but because of structural factors in the lending market I don’t believe that the fall is going to be anywhere near as severe as what happened in many US markets.

    And they didn’t have bad mortgage origination mandates stuffed down their throats.

    This is huge. This is classic matrix management. Reporting to two bosses. What happens to performance when one has to serve two conflicting masters?

    Clearly there is a negative cost associated with being forced to lend to bad credit risks. Even Andrew Cuomo, then Clinton’s HUD Secretary made this forthright admission. It’s as simple as this – if a politician can’t make a successful case for appropriating money in the federal budget so that it can be used to help minority home ownership levels then that indicates that there is a cost to society, rather than a benefit, that is being put in play. Shifting the cost to the financial sector doesn’t make the cost to society vanish.

    Now that bankers were forced to issue suboptimal loans they had less reason to hold the loans in their own portfolio than did the Canadians. Canadian bankers made solid loans which met one criteria – good financial decision making on loan origination. US bankers had to compromise between serving two masters – making the best loans they could in terms of risk/reward and making loans to minorities so as to satisfy their political masters.

    CRA and various mandates of similar intent corrupted the decision making model. There are consequences that erupt from corrupted standards. I’m not surprised in the least that professional analysts don’t want to touch the issue of housing policy designed to increase minority home ownership levels. That’s broaching into territory similar to touching an exposed wire carrying live electrical current.

  • john personna

    Hey Tango, you know that the dissenting version of the Financial Crisis Inquiry Commision was written by the Repubs, right?

    It says:

    As an example, non-credit derivatives did not in any meaningful way cause or contribute to the financial crisis. Neither the Community Reinvestment Act nor removal of the Glass-Steagall firewall was a significant cause. The crisis can be explained without resorting to these factors.

    Talk about comment trolls and alternate realities.

  • 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.

    I agree. The rules of the marketplace are set by government. The players within the marketplace try to maximize their own interests. They’re focused on the small picture. The big picture worries are left for the rule makers.

    How the game was played was different in Canada than in the US. Not completely different of course but different enough.

    When the whole MBS market was imploding I seem to recall that Canadian banks had pretty manageable levels of exposure to subprime securities yet many European banks had higher levels, levels which did in fact threaten stability. Why the Canadians had lower exposure is, I think, a very interesting question. The credit rating agencies were giving their blessing to these securities, so it couldn’t be a statutory causes because other non-US banks gobbled them up.

    My hypothesis is cultural differences. Americans are very, very attached to the immigration myth where the poor and huddled masses can come to our shores and make a success of one’s life. This myth is currently being applied to uneducated Hispanics flooding across our border. The reality paints a different picture. Canadians are well known for being very selective in their immigration process and a recent report from the federal bureaucracy made the honest observation that Canada should discourage immigration from the Caribbean basin and focus on encouraging immigrants from China and India because the latter have higher levels of success and less social dysfunction once in Canada than do Jamaicans and Haitians and such. Can you imagine an American bureaucrat being so forthright in a policy paper that is circulated to the American political leadership? I can’t. We’re far more invested in racial myths in our culture than are the Canadians, not that they’re pure rationalists, but they’re not as far gone as us, their understanding of the world around them is, in part, influenced by data. My point is that I find it plausible that Canadian bankers would be very aware of who many of the subprime borrowers were and they knew deep down that a busboy making $10 per hour wasn’t in a position to be buying a $500,000 home. They instinctively knew that a crass MUST result from such irresponsible lending. That left them with the question of how to play so as to exploit short term gains in the subprime market while minimizing the risk that they would be holding a lot of paper when the game of musical chairs came to an end, as they knew it must. If there is merit to that hypothesis, then what I don’t understand is why European banks were so heavy into subprime securities.

  • Hey Tango, you know that the dissenting version of the Financial Crisis Inquiry Commision was written by the Repubs, right?

    1.) See comment above about Canadian versus American perspectives on race.
    2.) President Bush was also a big booster of the ownership society. You’re setting up a strawman, that is Republican politicians were against CRA and associated initiatives. Clearly many weren’t.

  • Key graph: “in Vancouver, you need 3.2 average wage earners to make the payments on an 80% of sale price, 5 year fixed rate first mortgage.”

    Vancouver is like San Francisco in a way. It’s a desirable place to live, especially in frozen Canada and its geography creates real estate scarcity. It’s bounded by ocean on the West, the US border on the South, mountains to the North, and a funneling towards mountains in the East. Cities like Edmonton and Calgary, like Dallas and Houston, can expand in all directions pretty much forever. Land supply is not a problem in these latter cities.

    Your chart shows that people can afford to buy homes in most Canadian cities but that Vancouver is operating on a different level. The chart does show that there was a correction in pricing during the housing crisis but then prices took off again and are now higher than before the crash. If some Canadians have made their bundle and are sick of living in Winnipeg then quality of life concerns may be a significant factor in driving the Vancouver market. We see the same thing with people here moving to the Southern states for climate related reasons. So long as people from the rest of Canada want to escape 4-season climate, Vancouver will see greater demand for real estate and this will distort it’s market.

  • FWIW, I thought my offer to learn from some sane and moderate voice who believed the CRA connection was a fair one. It would be a stretch for me, given my starting place, but I’d genuinely try.

    Here is a pundit who began as skeptical of the CRA connection and after debates with Ritholz and Salmon and others who challenged his tentative move over to the CRA position, the process of investigating the issue led him to strongly favor the CRA position. Read his report. It’s rich with supporting data.

    Steve Sailer did a very good job of engaging Ritholz and Ritholz admitted that Sailer was presenting cogent arguments but that Ritholz wasn’t satisfied because the arguments weren’t presented in a methodological framework he preferred. That raises the interesting question of why he’s dismissing what he refers to as cogent arguments and why he favors incomplete but data-rich arguments? He’s favoring a form of analysis which appeals to his preference for detailed statistical sources and he’s rejecting cogent arguments which are not built on from expansive statistical databases. He constructs reality in a distorted fashion. He sure doesn’t come across as reasonable by saying that cogent arguments should be ignored because they don’t meet his preference for modeling.

    To apply Rumsfeldian logic here, Ritholz makes a good case for the known knowns and he ignores the known unknowns. In other words, he and many of the commission members, think that their explanation of the factors that they examined are all that is necessary to explain the entire process and that what was examined is mostly immaterial. We see this type of thinking quite frequently in many other realms. It’s a flawed method of analysis which consistently yields incorrect answers and solutions because one can never develop a true understanding or an effective solution until one fully understands the problem.

  • and that what was unexamined is mostly immaterial.

  • john personna

    “Hey Tango, you know that the dissenting version of the Financial Crisis Inquiry Commision was written by the Repubs, right?”

    Your answers are to ignore the Republican dissent, because it isn’t crazy-right enough for you?

    It is to laugh.

  • Your answers are to ignore the Republican dissent, because it isn’t crazy-right enough for you?

    Can you actually try to present a substantive point instead of vomiting forth with insipid characterizations?

    Do you dispute that American bankers faced a matrix management scheme which Canadian bankers didn’t face?

    If you don’t dispute this then do you dispute that the goals of the two “bosses” were often in conflict? Are you perhaps arguing that the goals of the two “bosses” were always perfectly aligned, that sound lending practices were completely reconcilable with the goal of increasing loans to minority applicants?

    If you want to dispute anything I write then it would help your case to actually present argument and evidence.

  • steve

    1) Canada also has tighter capital requirements.

    http://shadowbankers.wordpress.com/2009/06/13/canadian-bank-regulatory-capital-requirements-are-they-tougher/

    2)”And they didn’t have bad mortgage origination mandates stuffed down their throats.”

    Take away the GSEs and the CRA, and you still have every component you need to have created this crisis. As evidence let me offer most of the rest of the developed world. Replace Fannie and Freddie with a few more Citis and BoAs, and you end up the same place. I would think that capitalists would believe that incentives matter. I read Fama every now and then and I believe that he would agree that incentives matter. Why wouldnt the ability to make billions by securitizing and hedging be sufficient incentive? (Think about it. They had models which showed you could lump together any kinds of loans, no matter how crappy, and still make lots of money.) Why would they even care if the govt did or did not want them to lend? (Also, see Alt-A loans.)

    OTOH, if you are correct, this is great. We can just tell banks what we want them to do and they will do it. maybe Lord Acton was wrong.

    3)Texas. One of the biggest reasons Texas was less affected by subprimes was their strict regulation of home equity loans.

    4)EMH. I think EMH still has value, but like every economic theory, it has holes. The Austrians are as good as anyone at illustrating its problems.

    http://mises.org/daily/4056

    5)”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.”

    Friedman would not like this. Greenspan would not like this. The theory that banks/bankers do not need to be regulated since they would not act against their own self interest is blown up if you buy into this paragraph.

    6) If memory serves, doesnt Canada also require PMI? If you require money down, PMI and dont let your banks overleverage, how could you generate a subprime crisis like we have?

    Steve

  • michael reynolds

    Information on Steve Sailer, Tango’s expert source from above:

    http://tpmcafe.talkingpointsmemo.com/talk/blogs/jade7243/2009/04/steve-sailer-a-contemporary-ra.php

  • steve

    Also, a reminder that those contending that the GSEs had a primary role had to change the definition of subprime to make their theory work.

    http://13bankers.com/2010/05/18/calomiris-wallison-citation/

    Steve

  • Also, a reminder that those contending that the GSEs had a primary role had to change the definition of subprime to make their theory work.

    You’re losing sight of the big picture by focusing on what someone contends is a point of ambiguity deep into the minutia.

    If GSEs are not playing a primary role then they really shouldn’t be hemorrhaging via losses. Those entities who did load up on bad securities should be either dead and buried or in the intensive care unit.

    Your attempt to rewrite history isn’t working. The evidence on the ground, via the big picture, contradicts your revisionist claim.

  • steve

    “Your attempt to rewrite history isn’t working. The evidence on the ground, via the big picture, contradicts your revisionist claim.”

    I think it is important to know what happened and when it happened. I think it clear that the GSEs have been used as a backdoor bailout for the banks. That is a lot different than helping create the crisis. I guess it should also be pointed out that even banks with few subprimes could face big losses just from the decrease in housing prices. From my POV, revisionist history looks only at the present.

    Steve

  • I think it is important to know what happened and when it happened.

    Yes, I agree. If you can make a convincing case for your position by citing evidence and, in totality, the evidence points to GSEs being blameless then I’ll concede the point.

    Extraordinary claims require extraordinary evidence. You’re rowing against the tide of a lot of evidence.

    I think it clear that the GSEs have been used as a backdoor bailout for the banks.

    Here too I agree.

    That is a lot different than helping create the crisis.

    No, it’s not. There is nothing precluding two processes from running simultaneously, that is, losses accruing due to conduct which helped spur on the crisis and losses accruing due to backdoor bailouts.

    The very fact that a process of mortgage securitization exists creates the potential helping this bubble get off the ground. Securitization can be managed responsibly or irresponsibly, it can be managed responsibly for a period of time and then management practices can be changed and the underwriting and evaluation criteria can be irresponsibly changed.

    Secondly, securitization creates a moral hazard in the process of underwriting a mortgage. The originator is substantively not on the hook for loan performance. The securitizer isn’t either. The buyer of the security isn’t either. As we saw happen, originators who practice poor loan origination practices can be compelled to buyback the defaulting loans, but when they don’t have the resources to buy them back, there is limited recourse available for the party holding the defaulting loan as part of their security. They are left to deal with foreclosures, etc. This moral hazard is not present in the Canadian system where the bank that originates the loan holds onto the loan in their portfolio.

    Secondly, the GSEs knew full well that they were buying loans originated to clients with low creditworthiness. They had to buy the loans, they were under political pressure to buy the loans and to package them. The whole CRA scheme would fall apart if the banks were required to make the loans but the GSEs were not required to purchase them.

    Here’s the Washington Post reporting in Aug. 2008:

    In January 2007, as years of loose mortgage lending were about to send the nation’s housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

    Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step “toward optimizing our business.”

    A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

    Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

    Since then, Fannie Mae’s exposure to loosely underwritten mortgages has produced billions of dollars of losses and sent its stock price plummeting, prompting the federal government to prepare for a potential taxpayer bailout of the company. This month, Fannie Mae reported that loans from 2006 and 2007 accounted for almost 60 percent of its second-quarter credit losses.

    Fannie Mae documents from the period, obtained by The Washington Post, paint a picture of a company with the dual incentives of fostering affordable housing and making money, and of one caught between the imperatives of increasing its market share while avoiding excessive risk. In a bid to juggle these demands, the company’s executives took on risks they either misunderstood or unduly minimized.

    Notice the last bolded statement. Again we see the dreaded matrix management system where an unfunded social mandate is placed on an organization when the mandate runs counter to the purpose of the organization.

    There is a mountain of evidence in support of the position that GSEs were neck deep in this mess. As Dave noted in his post, and I reiterated in my comments, the managers of the GSEs were optimizing as best they could to the rules that were imposed on them – earn profits, support social policy, underwrite mortgages. GSEs used to earn profits by underwriting mortgages. Underwriting mortgages to bad credit minorities is not going to be a profitable exercise unless the higher risk is accurately reflected in the interest rate which would make the mortgages too expensive for the applicants. The whole reason that these CRA-type mortgages needed to have the force of law behind them was because they were deals that all rational bankers would avoid. If Congress wasn’t prepared to allocate money to fund the underwriting of the risk then those costs were simply shifted onto the private sector, hence the unfunded mandate. That set the cancer loose in the financial system. What followed was predictable, both in terms of value maximizing behavior from the bankers and the ultimate outcome.

  • john personna

    “Can you actually try to present a substantive point instead of vomiting forth with insipid characterizations?”

    Sorry, I’m not going play the “build an alternate reality in the comment stream” game.

    It is a sad internet pattern. It won’t stop because I don’t play. But I won’t play today.

  • john personna

    “Do you dispute that American bankers faced a matrix management scheme which Canadian bankers didn’t face?”

    BTW, this was a classic attempt to twist away and make an indirect argument, ignoring the direct evidence. We are talking about the CRA myth.

    No one on that Crisis Commission, of either party, laid blame on the “mandated loans” that have been grist for the paranoia mill.

    That is really big, because if there had been a shred of an argument, you know the rightmost members would have made the case, to further their political goals.

  • Based on the comments to this post I’m now working on two additional posts: one an extension to this post and another on the “emotionless man” in American cinema.

    There are a few reactions I’d like to make to a couple of the comments. First, I took care to mention the minority report on the financial crisis (in an antecedent post) specifically because the minority did not find the CRA to be causal to the crisis. I agree. However, I don’t think that means that housing policy, generally, is irrelevant. At the very least I think it was contributory.

    It bears noting that there was a second minority report, written by a minority of one. That member of the commission attributed the financial crisis primarily to the CRA and the GSEs and I presume it is that view to which Barry Ritholtz responds so vehemently. I haven’t seen any specific reactions by him to the minority report I’ve cited at this blog which specifically found that the CRA and GSEs were not causal but found them contributory, which I think is reasonable.

    Second,

    When someone says our banks should be well behaved … that’s socialism.

    I do think our banks should be well-behaved. I don’t they should be expected to be well-behaved on their own. Regulation is required. A big part of the financial crisis is that regulations were in place and federal agencies were empowered to act and they did not do so. That’s why I fault regulators to a much high degree than I do bankers. When bankers follow the incentives they have, adhere to the letter of the law, and the entire system turns to crap it’s not the bankers’ fault. It’s the fault of the regulators and the Congress, the guys who make the rules.

    It seems the Canadians take a different view, one in which bankers appear to believe the integrity of their profession matters.

    Bankers are not professionals. They don’t have professional responsibilities. They are tradesmen like grocers or used car dealers. If you expect tradesmen to be looking out for the greater good you are bound to be disappointed.

    I don’t see as much evidence that Canadian bankers have behaved better for reasons of probity or looking out for the greater good but that they’re more highly regulated and just regulated differently.

    Friedman would not like this. Greenspan would not like this.

    I am indifferent to what either likes or would have liked. Milton Friedman was an economist not a prophet. Economics is a science of human behavior. To believe that people should act in ways other than their incentives and responsibilities direct isn’t economics, it’s religion. I might add that bankers were acting with the confidence born of experience that however badly their decisions affected the larger economy they’d be bailed out. Alan Greenspan is acknowledgedly an objectivist. Objectivism is religion and a religion with highly dubious views of human behavior. For me that makes any pronouncement of his on the subject of human behavior suspect (not wrong—suspect).

    I believe in a flawed human nature (something that goes back at least to Paul of Tarsus and, possibly, to the Greek philosophers). The implication of this is not only that regulations are necessary but that the incentives of regulators must be aligned in such a way that they’re more likely to enforce the regulations.

    It is why I have the anachronistic belief in a government of limited and defined powers.

  • john personna

    We probably more or less agree on philosophy, Dave.

    Perhaps with one small exception. When the home buyers, bankers, and regulators all fail (nay, Epic FAIL) I’m willing to fault all of them.

    We had some winging on local radio how home buyers should not be blamed, because they bankers (“the supposed experts”) gave them the loans. Well, that’s a little like saying bankers shouldn’t be blamed because the regulators (“the supposed experts”) should have stopped them.

    They all f’d up.

    Now, when you say “housing policy” has a share of the blame, I’m with you again, but I mean the whole thing head to tail … and I think the mortgage deduction is probably more culpable than the CRA.

  • When the home buyers, bankers, and regulators all fail (nay, Epic FAIL) I’m willing to fault all of them

    When you go into a store and pay the price that was asked for a button, you’re not doing anything wrong. Even if you bought the button this week rather than next week because it was on sale or because you were concerned that prices might go up next week. Houses are different than buttons only in that they are more expensive.

    In my view there is a hierarchy of accountability and when you spread fault as widely as the commission did you are ignoring the hierarchy which implicitly lets those most culpable, clearly the Fed, Congress, and other regulators (because of fiduciary responsibility), off the hook.

  • john personna

    “When you go into a store and pay the price that was asked for a button, you’re not doing anything wrong.”

    So, say it was an expensive button, and the salesperson said “here, let me fill out this credit application for you” …

    In the worst cases, when that “shopper” knew they could not make the payment for long, and were betting totally on appreciation, when the sales person knew it, when the bank knew it … then it was actually a diffuse net of “accomplices.”

    In my view there is a hierarchy of accountability and when you spread fault as widely as the commission did you are ignoring the hierarchy which implicitly lets those most culpable, clearly the Fed, Congress, and other regulators (because of fiduciary responsibility), off the hook.

    The regulators had the most direct oversight responsibility, and had they acted, the crisis was preventable. I agree that this is the bottom line of the report.

    I don’t let anyone off the hook, and I don’t think that read correctly the report does either.

  • michael reynolds

    Bankers are not professionals. They don’t have professional responsibilities. They are tradesmen like grocers or used car dealers. If you expect tradesmen to be looking out for the greater good you are bound to be disappointed.

    Actually, I do expect tradesmen to be looking out for the greater good. For example, I expect Wal-Mart not to buy clothing from factories that use involuntary labor, or that endanger children. I also expect pharmaceutical companies not to sell harmful drugs just because they can sneak it past a regulator. And I expect the the car dealer to dispose of used batteries properly, even if he could save a few bucks just throwing them away.

    Likewise I expect mortgage broker or banker to pause when they see a cab driver making 30k a year try to buy a house that costs 500k. Civilization cannot run on the letter of the law absent a moral foundation to fill in the inevitable gaps between laws.

    It is not right to expect less than moral behavior from anyone, individual or corporation. When we do that and take a boys-will-be-boys attitude we reward the worst and punish the best and society suffers.

    Disappointed I often am, but disappointment presupposes an expectation of better behavior. So I will continue to be disappointed, but not stop expecting better behavior.

  • PD Shaw

    Reading further from some of the links and elsewhere, it’s not clear to me that Canada has a tougher regulatory environment. Canada has about six banks, essentially guaranteed freedom from market entrants, and thus the banks behave differently than a country based on non-oligopoly banking. For instance, the inability to get a thirty-year mortgage, with no penalty for prepayment appears to not be regulatory in origin. It appears to be based upon the banks having greater power over the consumer. And also since they are the beneficiaries of this set-up, the oligarchs are invested in it and invested in making sure their fellow oligarchs play by rules that don’t expose them all to risk.

    (One of the links even indicated that the 80s/90s U.S. deregulation trend started to move the U.S. towards the Canadian model, not away)

    I see more evidence that the U.S. has multiplicity of regulations that create inefficients and coverage gaps, which does not necessarily equate to a continuum of tougher versus weaker regulation.

    I would not be disturbed by eliminating all state and local banking in exchange for having about six banks all located a few blocks from each other like in Canada. I just think my countrymen would not accept it.

  • john personna

    PD, the core problem in the US was that no one cared if the loans were good. NINJA loans were fine, if you could pass them off to some other sucker fast enough.

    I believe Canada had enough regulation to make that not a problem. Simple as that.

  • PD Shaw

    Could you actually cite the regulation? Not all systems rely upon formal constraints.

  • DG

    Most Cdn mortgages are sold by the lender ie. the bank. Since they are lending their own money, credit quality is a factor in the mortgage officer’s compensation. In the US, mortgage brokers arrange loans from a variety of sources on a commission basis. This biases the deal to the highest mortgage amount and encourages fudged income numbers on the applicaiton.

    Second, the local loan requirements applied to US banks was threatened in Canada but not enacted. This has generated much of the sub-prime portfolio in the lower-income US neighbourhoods. That most of these mortgages end in default should not have surprised anyone, except the rosy-lensed Democrats who had the dumb idea in the first place.

    — Fewer foreclosure notices — a lot fewer. This is the most shocking stat of all. In the United States in 2008 a full 4.5% of mortgages are in 90-day arrears (i.e. the local sheriff is ready to move in and tack a notice to the door). In Canada, the figure was one 20th that level — just 0.27%. Amazingly, while the U.S. figure of 4.5% represents a doubling of the 2002 level of 2.2%, Canada’s 0.27% level reflects a halving from the (still low) level of 0.5% six years ago.

    – Less debt. In Canada, household liabilities as a percentage of assets sits at 20% — close to the stable, sustainable level it’s been at since the late 1980s. In the United States, the figure sits at 26%, after spiking radically upwards over the last decade

    — Less crappy mortgages. Canada’s subprime mortgage market (to the extent the bottom end of our mortgage market can even be called “subprime” in the American sense) represents only about one in every 20 mortgages. In the United States, the peak figure was about one in six. Astoundingly, up to a quarter of mortgages issued in the 2004-2006 period were in the subprime category.

    — Less debt, Part 2: In the United States, homeowners’ net equity as a percentage of home value has plummeted from around 65% to 45% over the last two decades. with more than half that drop coming since 2000. In Canada, on the other hand, this ratio has remained stable at between 65% and 70% since the 1980s. The phenomenon of mortgages going “underwater” — with homeowners owing the bank more than their homes are worth — is now tragically common in the United States. In Canada, it is virtually unknown.

    — Less off-balance-sheet mortgages. The frenzy of mortgage securitization that gripped the United States in recent years (famously explained/satirized in this comic strip) never really took off here. According to Scotiabank “The majority of mortgages are held on balance sheet in Canada, with only 24% having been securitized.” That’s huge, because it is the radioactive quality of these securities — many of which contain a tangled welter of mortgages of varying quality — that has really sunk the U.S. credit market: Since no one knows how much these complex instruments are really worth, they still haven’t established an equilibrium price level, thereby freezing the credit market for any entity that has a large number of them on their books. (What’s more, even those 24% have mostly been securitized through the CMHC, a Crown corp. with government backing.)

    — Smarter bankers, smarter standards. Finally, there is the fact that Canada simply has a different — and more prudent — banking culture: “Unlike many U.S. banks, Canada banks continue to apply prudent underwriting standards. In other words, they have always checked, and continue to check, incomes, verify job status, asks for sales contracts, etc., such that all those qursionts your banker asks in Canada have a purpose that somehow got lost on many American bankers. The no-income-no-job-no-asset (‘Ninja’) style, here-are-the-keys-to-your-brand-new-home lending just didn’t take hold in Canada.”

    — No bubble in the housing market: On average, Canadian home prices are roughly 200% what they were in 1989. In the United States, the corresponding ratio peaked at 260% before crashing down to 220%. In Canada, the more typical experience is that of my home, Toronto, which has witnessed steady increases in the 4-5% range every year, but none of the sudden surges and troughs that whipsawed homebuyers in U.S. markets such as Miami have witnessed.

    Read more: http://network.nationalpost.com/np/blogs/fullcomment/archive/2008/10/02/the-financial-crisis-for-dummies-why-canada-is-completely-immune-from-the-u-s-mortgage-meltdown-kind-of.aspx#ixzz1CXD8sIlm

  • john personna

    That was an easy trip to wikipedia, PD.

    “For example, banks and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value; beyond this level, mortgage insurance is generally required.[7]”

    That’s all it takes, an 80% LTV requirement.

  • john personna

    (I hope no one is going to make a “freedom to play with matches” argument at this point. Some individual freedoms (to be stupid) come with high negative externalities.)

  • michael reynolds

    So why didn’t Canadian bankers influence their government to ease these regulations? You can’t argue that it didn’t occur to them, I’m sure they have the occasional trip to Manhattan to see their high-flying American counterparts.

    So either the Canadian government is less corrupt than ours, or Canadian bankers are less greedy than ours. Either answer points to a superior ethical and moral foundation to Canadian society as the essential ingredient.

  • So either the Canadian government is less corrupt than ours, or Canadian bankers are less greedy than ours. Either answer points to a superior ethical and moral foundation to Canadian society as the essential ingredient.

    Or, in this instance, a wiser foundation. I don’t know that there’s anything unethical about a mortgage deduction or lacking LTV requirements, to pick two examples. In hindsight, though, it sure seems like their might be disadvantages to these policies.

    And it’s also worth noting that the regulations worked both ways, and so a lot of these laws the Canadian banks wouldn’t want American law adopted up there. The ability to avoid prepayment penalties and the existence of non-recourse loans are pro-consumer/anti-bank policies, but both arguably assisted the Canadians in avoiding what shellacked us.

  • michael reynolds

    I have never liked the mortgage deduction simply because it’s one of these things which once extended can never be withdrawn, and because it distorts choices (rent vs. buy) on a premise that is questionable. Among other unintended consequences it ties the labor force down geographically at a point in history when mobility would be useful.

  • michael reynolds

    This goes back to core values. Our core political values are:

    1) Does it empower the rich to get still richer?
    2) Are there a few bones for the middle class so we can build political support?

    If so, then alrighty, we have ourselves a policy. Questions about unintended consequences, or the long-term benefits to society, or what we’re going to do if everything doesn’t magically go according to plan, or even basic morality or ethics never come into play. The goal is always the same: serve the rich while pandering to the voters.

  • No argument here, Michael, but there’s little questioning the deduction’s historic popularity.

  • PD Shaw

    jp, that isn’t evidence of a regulation. The banks are generally requiring something, they may be requiring it because of government regulation, or because oligarchal business practices means they don’t have to worry that the customer has anywhere meaningful to go.

  • PD Shaw

    Here is a Canadian Bank that will loan 95% of value:

    http://www.tdcanadatrust.com/mortgages/downpayment.jsp

  • or because oligarchal business practices means they don’t have to worry that the customer has anywhere meaningful to go.

    Or because they’ve determined, quite prudently, that people need to have more than 5% of the home’s value in savings.

  • john personna

    Trumwill, what happens to your moral accounting when you bundle 100% LTV (and esp. liar loans) into “AAA rated” securities?

    Basically, if we give each state of the pipeline an “amoral pass” we’re toast. This, or something like it, will happen again and again.

  • Basically, if we give each state of the pipeline an “amoral pass” we’re toast. This, or something like it, will happen again and again.

    John, I don’t disagree with that. Am I supposed to?

  • john personna

    PD, now you are just making a wiggle argument. That is, if I don’t want to spend my Sunday surfing Canadian law (“Could you actually cite the regulation?”) you think you wiggle free.

    The game is obvious to the reader.

    FWIW though, here is a Canadian’s eye view:

    http://www.cpc.gc.ca/feature-dossierspecial/sec-cce-eng.html

  • Regarding the LTV, the Wikipedia paragraph doesn’t say that loans with LTV of 80% cannot be done or are not done. It merely says that if you do it, you have to get mortgage insurance. That’s not very different from the United States, actually. If there is a difference, it’s that more banks either worked their way around it with piggy-back mortgages and/or simply paid the mortgage insurance (which collapsed under the weight of the housing crash).

  • PD Shaw

    Trumwill, the take-away from Dave’s first link is that in the U.S. system, if a bank maintained higher barriers to getting a mortgage, the customer would go find another bank, possibly even a bank that did not exist ten years ago. In Canada, there are essentially six banks, operating as a self-enforcing oligarchy. They can impose lending requirements without fear of market entrants.

    I’ll quote the graph from the article: “Deregulation tended to move the U.S. closer to the Canadian model.” That’s because deregulation tended to consolidate banking power and make it’s bankers closer and more influential in government. But obviously, we’re not there yet.

  • PD Shaw

    I’m not necessarily arguing for or against any given regulation. In a post on Canada, regulation appears to be a moot point. The primary feature appears to be oligarchy. Oligarchy tends to be stabilizing.

  • john personna

    What was the old joke? Deposits at 3, loans at 6, and golf by 3?

    Something like that. There was a saftey in it.

  • PD Shaw

    Here’s evidence of regulation: “the Canadian Government also forced new buyers to have at least 5% cash down and they can’t count on a 40 year amortization anymore.”

    But look at the graph of housing prices:

    http://www.thefinancialblogger.com/next-bubble-to-collapse-the-canadian-housing-market/

  • john personna

    From that we can assume that higher standards would have made them safer still.

    There is an obvious trade-off, right? Home availability versus financial stability.

    If you don’t want a housing crash, you don’t allow home loans.

  • tylerh

    A simple possible answer emerges if one Consides other national economies that mostly dodged this mess: Australia, bunch of smaller economies in Africa, and many Petro-states.

    These widely diverse economies had one thing in common: they are resource economies feeding the Chinese dragon. Just like gas, tar sands, and timber-rich Canada. and Texas.

    So here is an over-simplification to consider: Economies linked o US real estate have suffered (eg. European banks holding too much US real estate debt) Economies linked to Chinese commodity consumption, which is increasingly driven by real estate, haven’t suffered. Yet.

  • Drew

    As any regular readers will well know, I rarely agree with Sir Reynolds, but on this I think he is spot on:

    “I have never liked the mortgage deduction simply because it’s one of these things which once extended can never be withdrawn, and because it distorts choices (rent vs. buy) on a premise that is questionable. Among other unintended consequences it ties the labor force down geographically at a point in history when mobility would be useful.”

    My only admonishion would be that the deductions afforded rental property owners might in some way approximate those of home buyers and reduce the cost-to-consumer differential MR cites. But the bottom line pertains (to bastardize a phrase) – subsidy, always and everywhere, is a poor economic choice.

  • Geoff Belton

    I haven’t even read the whole article yet but right off the bat I need to point out a glaring error in this premise:

    “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.”

    The author must be ignoring many of the emerging facts which expose the powerful influence that the top men in the banks have over the top men in government.

    For at least the past 20 years the bankers have exercised their power upon legislators to put down any and all attempts to create better and safer regulations that would protect us all from their rampant profiteering. But of course the history of the rich exerting disproportionate influence on governments goes back further than any written accounts can relate. As ever though, they will only go so far as the people will let them.

    We must not let them get away with this nor go any further, which they still seem to be doing. This is not merely a matter for the American people and their bankers, this is a matter of international law that calls for a broad ranging investigation and prosecutions of those who acted fraudulently.

  • mikel

    This page came up second in my search so I thought maybe I’d comment from Canada.

    What is seldom discussed is WHY so many people in the US defaulted on mortgages. We’re told ‘they couldn’t afford the place’ in the first place, but that seems unsatisfactory. People WANT a home. I suspect they LOST their homes because of another cause-namely, the evaporation of manufacturing jobs and lack of growth in the ‘job economy’.

    In the maritimes of Canada you’ve essentially had stagnant to no growth for YEARS. In New Brunswick, the ONLY growth in GNP is due to the Irving family owned oil refinery. One third of the provincial budget of these provinces is paid directly by the federal government in the form of equalization payments. Take that away and you would have seen a collapse DECADES ago.

    As others have said, IF the economy stays solvent then homes can appreciate. In the prairies and maritimes, even ontario and quebec, you see housing prices staying afloat partially because of the mass exodus from rural areas.

    How long that lasts is another question. Ontario is the ‘engine of the east’, the manufacturing centre of Canada. The federal government immediately propped up the failing auto makers. Currently, like the US, the government simply has no idea how to sustain growth so it is mirroring the US in that spending on policing, security, and military is now skyrocketing in order to maintain jobs by a conservative government that doesn’t equate ‘safety’ with ‘government spending’. These priorities are VERY unpopular with canadians, but lack of opposition means the government can essentially do what it wants.

    As for regulation, that was mainly that oligarchic manouverings. The Prime Minister hated his Finance Minister, who propped up his deficit cutting on the backs of pension funds, and who wanted to deregulate banks. There was considerable protest, but again it was a majority government and the PM quashed bank deregulation but offering them the bone of purchasing lucrative insurance companies.

    Also, there are only five banks who have had a mafia like hold on ALL the savings of the entire country. This is partly the reason given for lack of productivity, which is FAR below US levels. Small business people have complained for DECADES about the service fees of banks. Canada, moreso than the US, is RUN by banks. While their investments have dropped, they essentially have the population of the country backing up their assets. And there are only four of them.

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