A Loaded Question

There is perhaps little that is more frustrating than when intelligent people in the United States always attributing financial market shocks to the inherent instability of banking. The reason that I say this is because these assertions are often based on U.S. experiences and not overall banking experiences. For example, the Canadian banking system has performed quite admirably — especially compared to the U.S. — in a number of instances in which financial factors were thought to be central to economic fluctuation (e.g. the Great Depression, the current recession).

This poses an important question. What is different about the Canadian banking system? I have a very clear hypothesis that draws on the work of George Selgin and others that suggests that legal restrictions have typically been the culprit throughout U.S. banking history (although we might expect them to be marginally less so in the present context given some relatively recent de-regulation) as well as other policies that generate misaligned incentives.

However, what I am truly interested in is the opposing opinion. What makes U.S. banking different fundamentally from Canadian banking? And, as a follow-up, why would a return of Glass-Steagal be preferable to reforms that make us more like Canada?

4 responses to “A Loaded Question

  1. My understanding is that (sweet, kind) Canada has banking policies that seem Dickensian to her neighbors. There is no subsidy for housing, and lenders have full recoverability on foreclosures .

    No tax deduction, no Fannie & Freddie, no Community Reinvestment Act, no coerced mitigation. Yet: no housing bubble.

  2. jk,

    Not to nit-pick, but Canadian home prices have risen by 80% since 2002. Compare that to home prices in Phoenix which doubled from 2002 to 2007 and have since returned to 2002 levels. The increase in Canada has been substantially more gradual, but large nonetheless. Of course this need not imply that this is a bubble.

  3. I got lazy at the end. I wished I had said “no banking crisis.” I was not criticizing volatility (I rarely say “bubble” ).

    My poorly worded point was that the quality of Canadian mortgage loans was far superior thanks to a lower level of government interference,

  4. It’s Nice Post, keep posting and have a nice day… 08:59

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