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?

The Illinois Supreme Court has ordered that Rahm Emanuel’s name be returned to the ballot for the Chicago mayoral primary:

The Illinois Supreme Court ruled today that Rahm Emanuel can stay on the ballot for mayor of Chicago.

The decision comes without a moment to spare; early voting for the Feb. 22 city election begins Monday, Jan. 31.

You can read the opinion by clicking here.

A cheer went up at Emanuel’s headquarters when the news came out. The candidate was preparing to leave for tonight’s debate with the three other leading contenders. But first he stopped at the Clark and Lake “el” stop to greet voters.

The high court’s decision reverses a 2-1 Illinois Appeals Court decision Monday that ruled Emanuel ineligible on the grounds he did not meet the requirement of being a Chicago resident for a year before the election. Emanuel returned to Chicago last fall to run for mayor after serving as White House chief of staff to President Barack Obama.

The Chicago election board and a Cook County Circuit judge had earlier both ruled Emanuel met the residency requirements. The Supreme Court said the appellate court was in error in overruling them.

“So there will be no mistake, let us be entirely clear,” the Supreme Court wrote in its ruling today. “This court’s decision is based on the following and only on the following: (1) what it means to be a resident for election purposes was clearly established long ago, and Illinois law has been consistent on the matter since at least the 19th Century; (2) the novel standard adopted by the appellate court majority is without any foundation in Illinois law; (3) the Board’s factual findings were not against the manifest weight of the evidence; and (4) the Board’s decision was not clearly erroneous.”

Off-hand I’d guess that Gery Chico and Carol Moseley Braun aren’t amused. I can only wonder if those who brought the suit to challenge Emanuel’s eligibility will try to advance the case to the U. S. Supreme Court (which I’m guessing would refuse to hear it).

After interviewing hundreds of people the president’s Financial Crisis Inquiry Commission (a month late) has released its mammoth report on the causes of the financial crisis and arrived at what I think can only be considered a cop-out: everybody’s to blame—you, me, Republicans, Democrats, the Fed, regulators, Congress, bankers, consumers, foreign investors, everybody. Such a finding provides no clear guidelines for action. It is oracular rather than analytic.

There is dissension in the ranks. The commission was split, essentially along party lines, and the minority has produced its own report. The HTML text is here.

The minority report finds ten causes of the crisis:

1. Credit bubble
2. Housing bubble
3. Nontraditional mortgages
4. Credit ratings and securitization
5. Financial institutions concentrated correlated risk
6. Leverage and liquidity risk
7. Risk of contagion
8. Common shock
9. Financial shock and panic
10. Financial crisis causes economic crisis

The short version is that regulatory error (not too much or too little regulation but the wrong regulation) compounded by mammoth overseas capital flows were the smoking gun in the financial crisis. IMO the most significant finding in the minority report is that it absolves the Community Reinvestment Act and the repeal of Glass-Steagall from blame. The former is an article of faith among many on the right while the latter has much the same role for the left.

Mish Shedlock has an even terser explanation, assigning just three causes:

The actual cause of the financial crisis is easy to explain.

1. Loose monetary policies at the Fed
2. Fractional Reserve Lending
3. Congress willing to spend more money that it takes in

Had there not been Fractional Reserve Lending, and had the Fed not cut interest rates to absurd levels while fostering a “too big to fail” attitude at banks, this would not have happened. Perpetual Congressional budget deficits and the Fed’s willingness to finance those deficits too cheaply is icing on the “what happened” cake.

which comports more closely with the actual meaning of a cause as things that are necessary and sufficient for something to occur.

Barry Ritholtz demurs; he’s got a longer, more involved explanation.

In my opinion to identify what caused the financial crisis you’ve got to consider fiduciary responsibility. When viewed through this lens Mish’s argument becomes all the stronger. The main culprit was the Congress which placed impossible burdens and mutually contradictory mandates on the Fed, the Fed for exhibiting overweaning arrogance, and Congress and regulators in conjunction for allowing fractional reserve lending to grow completely out of bounds.

I won’t absolve bankers of actual wrongdoing; details of this are coming out even now but I strongly suspect that actual wrongdoing was contributory rather than causal.

I’m not entirely convinced by the commission’s minority’s argument that regulation wasn’t a primary cause because the financial crisis wasn’t isolated to the United States. I think that the widespread character of the financial crisis merely demonstrates that banks are interconnected and that banking regulators are subject to the same temptations everywhere.

There are two forms of regulatory capture. In the first form those being regulated become de facto responsible for their own regulations: they write the rules, pick who their regulators will be, and decide what is or is not an infraction. The second form, cognitive capture, is even more insidious. In the case of cognitive capture those being regulated don’t need to write the rules because the regulators identify with those they’re tasked with regulating, consider their interests first, and are predisposed to tread lightly on them.

I think we suffer from both forms of regulatory capture and the only remedy is to change the incentives of regulators. Failing that we’ll merely repeat the errors of the past until the entire system collapses in an Argentina, Zimbabwe, or Weimar-style loss of confidence. Then, having wreaked fantastic misery, the entire merry minuet can begin again with a combination of old and new players.

I’ve just published a foreign policy-related post at Outside the Beltway:

How Much Does Russia Spend On Highways?

As with so many resolutions, I have already broken this one. No, Russia does not spend as much on infrastructure by any reasonable measure as we do. And they should be spending a lot more.

I will not fact check the State of the Union message.
I will not fact check the State of the Union message.
I will not fact check the State of the Union message.
I will not fact check the State of the Union message.
I will not fact check the State of the Union message.
…

President Obama’s 2011 State of the Union, delivered last night before the assembled Congress in the Congressional chamber, was evocative. I do not necessarily mean this in a good light. I mean that the president called out several themes that have long been staples of his speeches and of the common political discourse without developing, adding to them, or improving them. To my ear the most common theme was “winning the future”. From whom?

Presumably, this is what he meant:

We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world. (Applause.) We have to make America the best place on Earth to do business. We need to take responsibility for our deficit and reform our government. That’s how our people will prosper. That’s how we’ll win the future. (Applause.) And tonight, I’d like to talk about how we get there.

The evidence that defense spending has had non-defense applications that have resulted in enormous economic growth (e.g. the Internet, printed circuit boards, solid state) is pretty good; the evidence that education has done so is much slimmer. We already spend more overall and per capita on education than any other country in the world. We are receiving diminishing returns to scale.

The speech was incoherent. This is no special distinction. Nearly every State of the Union address over the period of the last sixty years has been an incoherent, inconsistent shopping list of promises that will be broken almost as soon as they’re made and wishes that will never materialize in concrete legislation. It did not cohere; it did not stick together. How in the world can we increase spending on education and basic research and freeze domestic spending for five years without cutting existing programs? I blanched when I heard the words “basic research”, by the way. The examples he gave, the Internet and the space program, were not basic research. They were engineering projects. Had the president announced one or more specific mass engineering projects that he was proposing to the Congress, I would have stood up and cheered. But the ROI on basic research is awful. That’s why companies are reluctant to do it.

I was even more concerned when he mentioned medical research. Is there really a large backlog of projects in medical research that have the likelihood of bearing fruit in the foreseeable future that are starved for lack of money? Or are there an infinite number of possible projects in medical research, most of which will never bear fruit at all? I believe there are good reasons for the federal government to support medical research. Saving human life leaps to mind. However, we should hold out no expectations that such research will have near term impact or that it’s the stuff of which tomorrow’s industries will be made. That has not been the experience to date. Three fifiths of all healthcare spending continues to be funded from tax dollars and it appears that will continue to be the case. You cannot boost the economy based on something that requires tax dollars to survive. To believe that is to believe in the cat and rat farm I’ve written about before.

What in the heck is a “Sputnik moment”? This is a wonderful example of something which is simultaneously evocative and incoherent. Fully five years passed between the day in October 1957 that the Soviet Union launched the first satellite into space and President Kennedy announced his intention to send a man to the moon and a decade before its greatest triumphs. I doubt that President Obama’s evocation of Sputnik was a plea for long range planning. Contrariwise, I suspect that he was thinking of a rousing from decades of torpor into immediate and urgent action. A better metaphor for that would be a “Fort Sumter moment” or a “Peal Harbor moment”. We’ve already had one of those on September 11, 2001 and we’re still trying to muddle through our response to that, unable to decide what to do. Nearly a decade has passed and we’re still in Afghanistan and we’re still in Iraq and there are still major terrorist acts taking place in the West (as the attack on Moscow’s airport a couple of days ago demonstrated). His pledge in the speech to hold to his promise to begin withdrawing from Afghanistan this year is hardly a model for decisive action. It may be realistic or practical or politically necessary but it is not decisive.

How will increased education spending reach the 40% of the students in New York, Chicago, and Los Angeles who fail to graduate from high school on time? (and have done so persistently over the period of the last half century) Will building roads between the islands of Hawaii or bridges to nowhere in Alaska with federal tax revenues (or, worse, with borrowed money) really be the key to a bright economic future for the United States?

Mr. President, dream no small dreams. Rather than being content to rest on laurels, double down on the solutions of the past, or divide an ever-shrinking pie more equitably, make a bold new proposal of your own. I want an Apollo moment, not a Sputnik moment.

The complete text of the speech is here. As usual Joe Gandelman has a fine round-up of media and blogospheric reaction. Memeorandum has an automated (or semi-automated, I’m not really sure) news aggregation on the speech.

Both of Chicago’s major newspapers have editorialized against the Illinois Appellate Court’s order to remove Rahm Emanuel’s name from the ballot for mayor of Chicago.

Chicago Tribune

With startling arrogance and audaciously twisted reasoning, two appellate judges ignored more than 100 years of legal precedent, invented a new definition of “residency” and ordered Rahm Emanuel off the Feb. 22 mayoral ballot.

With the election just four weeks away, the appellate panel voted 2-1 to reverse the decisions of the Chicago Board of Elections and a Circuit Court judge. It’s an adventurous, flawed ruling that has immediate and profound consequences. The case is headed to the Illinois Supreme Court, but the ballots are headed to the printer — without Emanuel’s name. Early voting begins Monday.

In a blistering dissent, Appellate Justice Bertina E. Lampkin accused her colleagues, Thomas E. Hoffman and Shelvin Louise Marie Hall, of “careless disregard for the law,” and harshly criticized them for refusing to ask the Supreme Court for an expedited review.

Lampkin accused the majority of ignoring case law that clearly supported Emanuel’s argument —including a significant case in which Hoffman prevailed.

Chicago Sun-Times

The truest words issued by an Illinois Appellate Court Justice on Monday were these:

Striking Rahm Emanuel’s name from the ballot for mayor of Chicago unfairly “disenfranchises … every voter in Chicago who would consider voting for him.”

Unfortunately, Justice Bertina E. Lampkin wrote those words in a dissent of the court’s majority opinion, which did indeed rule Emanuel off the ballot.

Emanuel may be far ahead in the race for mayor in every poll.

He may be a true Chicagoan by every common-sense definition.

He may have relocated to Washington only temporarily and only to serve his country, as chief of staff to President Obama.

But if this ruling stands, two appellate court justices, employing a rather narrow reading of state law, will have decided that you, the voters, cannot choose Emanuel to be your next mayor — tough luck, folks.

I’m in no position to comment on the legal aspects of the Appellate Court’s decision. That will be for the Illinois Supreme Court to do, if it elects to do it. I am a bit curious about both papers’ standards for when it’s appropriate for the courts to address candidacy issues and when it’s not. Remember that the incumbent president of the United States was elected to the state senate by virtue of a case he took to the courts over the eligibility of his opponent. Should the courts have acted then or not?

Update

The Illinois Supreme Court has issued a partial stay of the appellate court’s order to have Rahm Emanuel’s name removed from the ballot:

The state Supreme Court today issued a stay of the appellate court order knocking Rahm Emanuel off the ballot and ordered Chicago election officials not to print any ballots without his name.

“It is ordered that the emergency motion by petitioner Rahm Emanuel for stay pending appeal is allowed in part,” the order stated. “The appellate court decision is stayed.

“The Board of Elections is directed that if any ballots are printed while this Court is considering this case, the ballots should include the name of petitioner Rahm Emanuel as a candidate for Mayor of the City of Chicago.”

The high court said it was still considering whether to grant Emanuel’s request that it hear his appeal on an expedited basis.

The petition issued by Emanuel’s lawyers included six grounds for reversal:

The ruling is “squarely inconsistent” with prior high court decisions on residency; the restrictive view of the majority has no precedent; the ruling infringes on the rights of those in Emanuel’s situation to vote; there should only be one legal definition of “resided in” in state and municipal code; the new appellate court residency requirement creates too much uncertainty for candidates going forward; and it strips candidates of the provision that government service does not have a negative impact on residency.

I’m not a lawyer but having read appellate court majority opinion the first two and the fifth have already been dealt with, the third is a matter for the legislature rather than for the courts, the fourth can be resolved by remedies other than by restoring Emanuel to the ballot. Whether Emanuel is one the ballot or off the ballot, the uncertainty will be resolved.

Tonight President Obama will give his third State of the Union address. I suspect I am not alone in wishing it could be tweeted.

If it’s what I dread it will be, it will be yet another annual shopping list, an hour-long catalogue of items, many of which we’ll never hear about again, intended to please this or that constituency.

Everybody seems to be giving advice so I’ll give mine: brevity is the soul of wit. Or, as David Belasco put it “If you can’t put your idea on the back of your business card, you don’t have a clear idea.”

This year I decided to give myself a birthday present: a genetic test. Six weeks ago I spat into a tube and mailed it off. The things that get sent through the mails never cease to amaze me (I used to have a client who sold urinalysis by mail order).

Now I’ve received my results back. Nothing earth-shattering or amazing but a lot of interesting stuff. Based on my reading a lot of their stuff is highly speculative or, at least, thinly sourced. Very little you’d take to the bank but it’s fine for entertainment purposes. And geneaological research which was my primary interest to begin with.

Nothing particularly surprising there, either. My paternal haplogroup is R1b1b2a1a2d3*. My maternal haplogroup is J1c3. Since my paternal haplogroup is common among the Swiss and my maternal haplogroup among the Irish, these results are not entirely unexpected (since the Schulers are Swiss and my mother’s mother’s mother’s mother was Irish). Mostly what I’ve learned is that there probably isn’t much unexpected to learn, which I guess is something.

In some ways I think this is sort of the modern equivalent of going to a fortune-teller. As long as you view it as just good fun, what’s the harm?