Category: Think Tank

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12 Responses to “Why Was Canada Exempt from the Financial Crisis?”

  1. rd says:

    They describe the political system but I think it is bigger than that. Canada has developed an implicit social contract between the population and the government with certain rights and responsibilities for both sides. You see it in many aspects of the society, ranging from gun control to the financial sector. One of the social contract aspects is that risk is essentially compartmentalized by general agreement. Some of the stock markets in Canada are as wild as anything you will see out there in the rest of the world. However, everybody knows that this innate wildness in the small resource companies cannot become the model for the rest of the economy, so you have a virtual free for all on the Vancouver Stock Exchange but the banks are not going to have significant exposure to that.

    People and companies take a lot fo risk in wildcat exploration and company startups. But this is done within an overall framework of universal healthcare and good unemployment benefits. Even the conservative politicians don’t want to break that model. Canada has a long, proud tradition of its military engaging in wars with allies based on treaties such as WW I and II and Korea, so it participated in Afghanistan as part of NATO and ended up with the highest casualty rate of any army. but the Canadian military did not participate in Iraq because Canadians didn’t see the connection with Afghanistan asnd so didn’t fight. These are all extensions of the same social contract that informs the bankers that blowing up the financial system would be unpatriotic and not what Canada is about.

  2. A says:

    I think the other important point is the connection between Wall Street and Washington. There is nothing like that revolving door in Canada (at least to the same degree). When many ethics-free US politicians are ‘owned’ by the big financial interests (ie: contributions to campaigns), it should not come as a surprise who is actually in control.

    In recent news, a Texan teenager could face life for selling hash oil brownees…and yet, Wall Street brings the world’s financial system to its knees and all they have to do is direct shareholder profits to a fine. And we wonder why 2008 happened…and may repeat.

  3. beeman says:

    I think that article completely misses the point. There is no mention of the CMHC.

    In my opinion, the reason Canada has been exempt from the financial crisis is because the crisis hasn’t happened yet. The bubble didn’t burst because the banks kept lending. The banks kept lending because the CMHC takes the risk of “risky” mortgages off the bank’s balance sheet by guaranteeing the mortgage payments.

    No risk, no downside, and risk-free return. If you were a bank, wouldn’t you keep lending? But as Americans have learned no party can continue indefinitely, and Canadian taxpayers are on the hook for the CMHC’s obligations — which is roughly the size of Canada’s entire national debt.

  4. huguesm says:

    Hello Barry,

    Two major omissions from the piece, one good and one bad:

    The good: In the 1990s, Liberal finance minister Paul Martin significantly improved the country’s public finances. He also rejected huge bank mergers: RBC with BMO and CIBC with TD. It took a lot of political will at the time, and these decisions have certainly helped Canada’s financial system weather the crisis.

    The bad: By all valid measures, Canada’s housing market is currently even more inflated than the US housing market at its very top in 2006. Prices will come down in the future, and even if the country avoids a crash, such a deleveraging is impossible without a significant amount of pain for Canadian homeowners and taxpayers at large. Reading this article feels like reading that recessions were a thing of the past in 1997, and that Greenspan and the Fed had mastered economic cycles. Let’s revisit this piece in 10 years…

  5. dsawy says:

    The Canadian approach to mortgages prevented the crisis from appearing there. They don’t lend money to people who are unable to save for a down payment, they don’t write 100% LTV loans, and banks keep a big chunk of the loans they originate, so they have a vested interest in making sure that their borrowers aren’t going to stiff them.

    This isn’t difficult stuff to explain or understand.

  6. [...] Barry Ritholtz passes along this interesting article examining the reasons why Canada was able to avoid the worst effects of the 2008 financial crisis. It isn’t necessarily what you might expect, the Canadian and American banking systems share many similarities, for example, and there isn’t substantially more regulation of banking in Canada than there is here. There are crucial differences, though, most of them rooted in the history of how the two banking systems evolved. And, of course, the different political structures in the country played a role. [...]

  7. Concerned Neighbour says:

    There are some excellent comments to this piece. “beeman” is correct in pointing out the huge role played by the CMHC in removing risk from the banking system. “A”‘s point re: less corruption is also valid, and I’d also point out there is dramatically less money in Canadian politics. Canadian federal candidates for the House of Commons IIRC are limited to spend $70K on an election. Corporate donations are illegal and personal donations are capped at $2,500 (again, IIRC).

    • 873450 says:

      “Canadian federal candidates for the House of Commons IIRC are limited to spend $70K on an election. Corporate donations are illegal and personal donations are capped at $2,500 (again, IIRC).”

      That says it all. Here in the USA, our SCOTUS decided corporations are people and money is speech. It’s what our founding fathers intended. God made us exceptional and bestowed upon us a manifest destiny to blanket the earth with our unique corporate finance freedoms.

      Tyrannical, communist government in Canada despises free markets and free speech. Some oppressed people there are forced to speak French. Canadians are not exceptional or free. They don’t know what freedom is.

      Success hating Canada is home to only 15-20 billionaires. Many more than that can be located at any given time in numerous residential addresses, just in NYC.

      Cry Canada.
      Pity Canada.

  8. andrew755 says:

    You would really need to live here to understand the full magnitude of what is happening here. I look out of my condo window (Toronto) and there are cranes everywhere. Yes, we are growing here but this is overbuilding. There are building proposals on every building and new buildings sprouting up everywhere. On the phone with my dad the other day he was trying to convince me that owning real estate was a part of Canadian culture.

    I’ve got people up here telling me how different it is up here… the banks are more stable and how we didn’t make faulty loans like the Americans.

    We will see what happens but nothing lasts forever.

  9. rlerner says:

    Really two parts to this article:
    1. Before 1987 Canada avoided bank failures because it had a highly concentrated banking system made up of a few players who worked things out for the good of all. The US did not.
    Response: True enough; limitations on branch banking were essentially internal protective tariffs, which only served protected owners of small banks. The savings and loan industry was a depression era response which attempted to circumvent the problem but created its own.
    2. Canada avoided the 2008 debacle because it didn’t change conservative mortgage lending practices to meet political demands, i.e, n “Canada,banks can’t offer loans with less than 5 percent down, and the mortgage must be insured if the borrower puts less than 20 percent down. Mortgage insurance is available, moreover,only if the household’s total debt service is less than 40 per-cent of gross household income.”
    Response : True: Toxic mortgage debt–securitized, sliced, diced and re-leveraged and sold to the World (though apparently not to Canada in substantial amount)– was at the core of the 2008 collapse. Add to that the US regulatory and industry associations’ complicity in allowing “relaxed” accounting treatment; “off balance” sheet schemes to deceive investors, and overall reduction in true, otherwise know as “tangible” capital (See, speeches/ writings of Thomas Hoenig,Vice Chair. FDIC) , and you get the financial nightmare we experienced.
    Regrettably, Mr. Ritholz avoids the key question: Why did the Canadian regulatory systems, public and private, hold to their principles, while the US and European regulators, not only caved ti industry demands, but actually fanned the flames of greed?
    Until we address this issue and find a solution, everything else is simply rearranging the deck chairs as we await the next iceberg.
    Roger Lerner
    Former Ass. Dir. Resolutions (Major Transactions) Resolution Trust Corp.

  10. econ1 says:

    Canada doesn’t shower housing with mortgage deductions, capital gains exclusions and turnovers etc.. Coupled with the higher credit worthiness required to get a mortgage that the article points out, you have a saner approach to housing. The current efforts to increase the price of housing in the US are working and yet some are even calling for reducing the requirements to get mortgage loans….again.

  11. [...] and second, that it held up extremely well during the Financial Crisis of 2008, as Canadian banks were required to have a bit more rigidity in their mortgage practices than their friends to the [...]