Krugman on the Canadians

Paul Krugman looks at the world's most boring country--Canada--to try to untangle why they stayed out of the news during the great financial train wreck. His account is as interesting for what it's not about as for what it is:

What did the Canadians do differently?

It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But 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.

Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in 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.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

[Also] 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.

These seem to me to be two rather different points: consumer protection and leverage. It would be interesting to think harder about how, if at all, they relate. I'm sold on the leverage point. On consumer protection--faithful readers will know that I have somewhat scroogelike sentiments about the borrowers in the subprime mess. My take is that an awful lot of them were grownups who took an eyes-open gamble and lost. End of story, move on. And Krugman himself has argued that the subprime meltdown in itself seems to small to have brought down an entire banking system. Or at any rate,if subprime did bring down a banking system, then our banking system is far more fragile and vulnerable than anyone understood.

So I'd bite on leverage, and go back and blow the dust off my old notes on Hyman Minsky, whose work languished unread on so many bookshelves through the high-leverage saturnalia.