Why Did Canada Avoid The Worst Of The 2008 Financial Crisis?

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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.

Rather than trying to excerpt the report, which is only four pages long, I’ve embedded it below.

Feature 2 by TBP_Think_Tank

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Doug Mataconis
About Doug Mataconis
Doug Mataconis held a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020. He passed far too young in July 2021.

Comments

  1. gVOR08 says:

    I don’t recall who said it, but a short version from 2009, ‘Banking in Canada is still boring.’

  2. Ron Beasley says:

    The great Libertarian state of Texas also didn’t suffer that much because it had the toughest restrictions on home loans in the country.

  3. Dave Schuler says:

    I posted on this subject years ago, Doug. It boils down to the differences in banking and in home mortgage financing in the two countries. Canada is much more conservative, particularly in home mortgage financing.

  4. Barry says:

    @Ron Beasley: “The great Libertarian state of Texas also didn’t suffer that much because it had the toughest restrictions on home loans in the country. ”

    After having been Ground Zero of the S&L crisis. At least they learn from getting burned.

  5. Barry says:

    BTW, f*ck motherf*cking Scribd. Somebody invented a website just to f*ck with people who wanted to read and print stuff?!?!?

  6. stonetools says:

    Ahem, Krugman -Doug’s favorite economist:-)- wrote on this several years ago. Even he thinks that Canada might be looking at a housing crisis soon

    Enter Canada. Famously, Canada’s old-fashioned, boring banking system avoided getting caught up in the global financial crisis. And for a while Canadian housing prices lagged those south of the border. Since then, however:

    And Canadian household debt has kept rising even as the US level has declined:
    So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

    I’m not exactly making a prediction here; but I guess I believe in the debt overhang story enough to be worried, and Canada is certainly an important test case.

    There are a couple of charts there, too, worth looking at.
    Given Krugman’s record, I’d say if Krugman’s worried, you should be looking to shift out of Canadian securities at the first sign of Canadian instability.

  7. Hal_10000 says:

    Krugman’s running against history, thought. As the article above notes, Canada has had zero bank crises in the last two centuries. Their argument is that this is because Canada has fewer banks and they are regulated by a single authority. I think there is something to that in that no one is overseeing all the crap our banks do.

  8. george says:

    Living in Canada, I’ll note that quite a few Canadian analysts, including some working with the major banks, have stated concerns about current Canadian house prices. Not too many Canadians are feeling smug about having missed the worst of 2008, the feeling is that it might still be coming.

    On the plus side, the 2008 crash in the US ended most of pressure the big Canadian banks were putting on the gov’t to loosen Canadian banking restrictions; at this point they’re just trying to make sure more restrictions aren’t added.

  9. C. Clavin says:

    Repeat after me:
    A strong and vigilant regulatory state is essential to capitalism’s success.
    A strong and vigilant regulatory state is essential to capitalism’s success.
    A strong and vigilant regulatory state is essential to capitalism’s success.
    A strong and vigilant regulatory state is essential to capitalism’s success.

  10. gVOR08 says:

    @C. Clavin: Decades ago J. K. Galbraith wrote about “countervailing power”. He said the only institutions strong enough to oppose big corporations were big unions and the government. They’ve pretty well succeeded at killing big unions and they’re well along in their project to neuter the government.

  11. C. Clavin says:

    @gVOR08:
    Guys like the Koch brothers have bought the Government.

  12. MarkedMan says:

    Short version: Canada banking is the least Libertarian in practice and therefore much less susceptible to crisis and chaos. Sounds about right.