Sensible Canadians

Via Kevin Drum, Fareed Zakaria praises Canadian policy as more sensible than both the U.S. and Europe:

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north.

Comments

[Anonymous]

That's an interesting, informative response, and I thank you for it, Koch.

That Canadians are risk averse is part of what I meant by their conservatism, not so much their politics as their national temperament, to the extent that one can generalize about that. Such aversion to risk, of course, has advantages and disadvantages.

I had thought of piggybacks on U.S. risk tolerance. This is a reflection of the comparatively higher energy and creativity in the U.S., from which Canadians do benefit in banking and other areas.

In their relations with the U.S., there is a have-your-cake-and-eat-it-too mentality, in that many Canadians define their identity, regrettably, through anti-Americanism while enjoying the perks and privileges that their neighbor provides them.

Now that Obama, who is widely admired in Canada, is in the White House, I think we can dare to look forward to closer, more productive relations between the two countries.

[Koch]

I don't have any definitive stats to point to. I might be able to assemble some, but it would take longer than I have at my disposal this week.

I think generally Canadians tend to be more risk averse than Americans. This probably has an effect on the banking culture and the limits to which customers will permit a bank to exceed certsin risk thresholds, or have an appetite for more doubtful products.

Secondly, Canada has a closely interconnected and highly regulated banking system. Canada only has five major banks (RBC, CIBC, BOM, SCO, CT/TD), they've existed forever in one form or another, and they watch each other extremely closely. They all generally compete for the same limited market, and since the government has discouraged mergers, they will all stay at about the same size (namely small, from a global perspective). Most people in the financial industry know each other, and they talk frequently. A bank could 'go rogue' and start acting in a much more risky manner, but everyone on Bay Street would know about it immediately. That doesn't present the image these banks want to offer to their - typically conservative - customers. There is little danger of an Iceland scenario, where all of the banks lurch in unison toward the abyss.

This doesn't mean that Canadian banks and other financial industry actors don't come up with inventive, innovative solutions to things (look at the ABCP mess, or the primacy of income trusts for a while), and don't take risks. It's just that of the major banks, no-one is willing to 'bet the bank', as it were, on extremely high profits in exchange for a much greater risk threshold. Canada doesn't have a lot of regional or local financial institutions - other than credit unions or Caisse pops, but I suspect that these things aren't big enough to shred the fabric of the national economy if they go down. As a result, the Canadian banks are big but thinly-spread.

As well, Canadian investors have access through the US to a wide variety of risky products. Canada piggybacks on US risk tolerances, and I suspect that - barring specific investment rules - a Canadian who wants to invest in a US fund or product line just does so through a US bank. I would think there would be less demand to introduce certain products into the (highly regulated and compliance cost-heavy) Canadian financial system for limited benefits (30 million people) where it is all available south of the border, and where Canadian corporations and major investors can open branches to access these products easily.

[Anonymous]

I agree, Koch, that Canada has benefited from its abundant resources as well as from the U.S. market that consumes them.

However, while that promotes confidence in the Canadian economy, it doesn't alone account for the stability of Canadian banking institutions.

Enlighten me, please. I haven't seen anything in Canada approaching Washington's recklessness, including slipshod deregulation, waging endless war, slashing taxes while expanding government, and claiming, as Mr. Cheney has, that growing deficits can be ignored.

[Koch]

Canadians' sensible pragmatism is founded on the fact that only 30 million people control an incredible basket of natural resources, from fish, grain, pulp, oil, water and hydrodams/electricity to uranium, copper, diamonds, iron ore, beef and sugar maples, and one of the world's biggest customers for all of those products is right nextdoor.

[Anonymous]

Canadians are close to being the true conservatives, with a healthy skepticism about the weaknesses of human nature. Not that Canadians are perfect, but I would wish more exports of their sensible pragmatism to their southern neighbor.

[ian in hamburg]

Interest on your mortgage is deductable in Canada if you rent out the property. At least that was the case until about 5 years ago... did the rules change?

They do have a hefty capital gains tax, though. That tends to weed out the speculators.

Canada's real estate market is also subject to local conditions, just like it is anywhere. The Vancouver market, for example, is being bouyed by the 2010 Winter Olympics, but even there the foam has been blown off the top.