Matt Yglesias

25 Responses to “Canadian Initiative”

1. Becca Says:
   October 18th, 2008 at 8:34 am

   In a nutshell, Canadian regulators told the bankers no to introducing more risk into their market. One dollar could not be leveraged over 20x. Those other markets that had a higher or no ceiling at all got hit the hardest. Seems pretty simple to me.

   FT reporter said Paulsen lobbied hard for lifting the ceiling back before he became head of treasury.

2. max Says:
   October 18th, 2008 at 8:47 am

   What Becca said. The Canadians started with traditional banks and they refused to engage in ‘financial innovation’ (which should hereafter always be read as ‘lying, cheating and stealing’). So the Candians banks weren’t going hogwild overleveraging themselves to purchase the various financial crap instruments on global markets.

   Banks in other places, like Iceland, DID go hogwild, and now they are in trouble. (Since purchasing (and selling or reselling) many of these exciting and innovative instruments allowed banks to claim that they have offloaded the risks and let them effectively lever up way past their statutory reserve requirements.

   Apparently the Canadians managed to avoid allowing that to occur, and good on them.

   max
   ['There are surely useful financial innovations that have been created in the last twenty years, but those have all been swamped by the crap.']

3. Will Says:
   October 18th, 2008 at 9:07 am

   Yes, the relevant quote is

   Experts here note that Canadian banks are more tightly regulated, more liquid and less highly leveraged. Instead of being highflying investment banks, they tend to operate in a more traditional manner, with large numbers of loyal depositors and a more solid base of capital.

4. Angelica (a.k.a. Battlepanda) Says:
   October 18th, 2008 at 9:19 am

   Yeah, but the article doesn’t specifically say whether the banks are more liquid and less highly leveraged because of specific regulation or corporate culture or ability to smell the rot from across the border or what.

5. DR Says:
   October 18th, 2008 at 10:47 am

   Lack of foreign influence. Canadian banks own branches outside the country, but they are legally barred from having anything more than token foreign ownership.

6. Sean Says:
   October 18th, 2008 at 10:52 am

   I think it’s at least partly just lucky we didn’t have the expertise in place to trade those instruments soon enough. My bank definitely wanted to build a bigger CDO/CDS business but didn’t have the technical infrastructure in place to make a trade until 2006, which didn’t leave that much time to build up exposure.

   Also, I believe CEOs of the biggest banks make about $10 million, so there might be less incentives to make excessive bets.

   And yeah, better regulations and more of a traditional banking culture too.

7. bab23 Says:
   October 18th, 2008 at 2:06 pm

   What am I missing? Isn’t it obvious, as commented above, that it was the over-leveraging of the repackaged CDOs and the credit swaps that brought us to this point? Why does everyone (y’know, the media ‘n whatnot) natter on about how it was the original subprime mortgages that caused the crisis? Isn’t that utter nonsense when the government has already loaned/guaranteed far more than the face value of all the subprime loans to try to stanch the bleeding from the banks’ financials?

   This is a case where the”guns don’t kill people, people kill people” line actually applies.

8. Leo Brux Says:
   October 18th, 2008 at 2:51 pm

   What about this:

   Wall Street banks in $70bn staff payoutPay and bonus deals equivalent to 10% of US government bail-out package

   = Guardian http://www.guardian.co.uk/business/2008/oct/17/executivesalaries-banking

   Why is there no report about this in US media, but all over media in Europe?

9. nick Says:
   October 18th, 2008 at 2:52 pm

   the joke is “WORTHWHILE Canadian initiative”, I believe….

10. Gordon Says:
    October 18th, 2008 at 4:48 pm

    The answer is of course that we have the right only to peace order and good governance but not to pursue much of anything. We are very uncomfortable with anything more than modest success. This “bubble resistance” like our thick downy coats, helps us to survive the winters.

11. Steve Canadian Says:
    October 18th, 2008 at 6:31 pm

    To think of this as something inherent in Canadians–such as we’re more risk-averse, or “we’re uncomfortable with anything more than modest success”–is silly. Our markets and our banks are better regulated because they haven’t been seen as being profitable enough for international financial interests to spend more money lobbying our government to deregulate. Yet. If either of our last two Prime Ministers, Stephen Harper and Paul Martin–both “free market” advocates–had won majority governments, we could very well have been in a different economic situation for the last few weeks.

12. yank_in_oz Says:
    October 18th, 2008 at 7:00 pm

    Australia also seems to be doing all right. There is probably some argument for better regulation than in the US. But I think another aspect of it is that the commodities boom (and fast rising incomes) meant there were a lot of good lending opportunities right here in Australia, so there was less pressure to chase higher returns by purchasing risky US securities. I wonder if that might not also apply to Canada.

    There were several non-bank lenders who had been sourcing capital in the U.S. markets and lending in Oz. They went under when the credit squeeze started to hit. Their loans were still all right in most cases, but they couldn’t get short-term financing. The big banks have strong depositor bases and cash to spread around, so they just bought up these assets at very good prices.

    There’s some talk that housing prices will start to fall (the commodities boom is ending, and a recession may be on the way). On the flip side, a somewhat slow and bureaucratic approach to allowing new development limits supply, and immigration will keep demand up, so the experts argue that it shouldn’t hit house prices too badly. Interest rates are also coming down from pretty high levels, so that should also support prices.

    I guess another thing to note is that Austarlia doesn’t have institutions like Fannie Mae. In Australia you have to pay extra to get a fixed rate mortgage, and few people choose to buy more than 5 years of fixed rates. Most people’s interest rates fluctuate with the markets. Fixed rate mortgages in the US are a subsidy provided by Fannie and Freddie. This is another case of middle class welfare that isn’t at all well-targeted.

13. Steve Sailer Says:
    October 19th, 2008 at 7:00 am

    By the way, the New York Times is now starting to sound a lot like me:

    The Reckoning
    Building Flawed American Dreams
    By DAVID STREITFELD and GRETCHEN MORGENSON

    SAN ANTONIO — A grandson of Mexican immigrants and a former mayor of this town, Henry G. Cisneros has spent years trying to make the dream of homeownership come true for low-income families.

    As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.

    Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices.

    And Mr. Cisneros became a developer himself. The Lago Vista development here in his hometown once stood as a testament to his life’s work.

    Joining with KB, he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He often made the trip from downtown to ask residents if they were happy.

    “People bought here because of Cisneros,” says Celia Morales, a Lago Vista resident. “There was a feeling of, ‘He’s got our back.’ ”

    But Mr. Cisneros rarely comes around anymore. Lago Vista, like many communities born in the housing boom, is now under stress. Scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records.

    While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.”

    They were lured by “unscrupulous participants — bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.”

    The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats.

    Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.

    He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too.

    The Paydays During the Boom

    After a sex scandal destroyed his promising political career and he left Washington, he eventually reinvented himself as a well-regarded advocate and builder of urban, working-class homes. He has financed the construction of more than 7,000 houses.

    For the three years he was a director at KB Home, Mr. Cisneros received at least $70,000 in pay and more than $100,000 worth of stock. He also received $1.14 million in directors’ fees and stock grants during the six years he was a director at Countrywide. He made more than $5 million from Countrywide stock options, money he says he plowed into his company.

    He says his development work provides an annual income of “several hundred thousand” dollars. All told, his paydays are modest relative to the windfalls some executives netted in the boom. Indeed, Mr. Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking and housing; it was unwavering belief.

    It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance.

    “You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.” [More]

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