Monday, February 1, 2010

Canada - Good and Boring - NYTimes.com

To cause the financial mess that started in 2007, everyone agrees that something, something big, went wrong . On what that big reason is, the debate continues. Everyone is certain that, it is one (or a combination) of the suspects listed below, but no one is certain which one(s) -

(1) Fed's incompetent handling of interest rates
(2) Having too-big-to-fail institutions
(3) Not enough regulation by govt

In the following article, Paul Krugman seems to be examining empirical evidence by looking at Canada, which is doing much better financially, to find out which of the above 3 reasons could have been the actual culprit : Good and Boring - NYTimes.com

Excerpts with slight modifications -
It wasn’t interest rate policy. Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.

It wasn't the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

It was this - failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

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