With the world leaders gathering for the G20 meeting in Toronto to debate more stimulus (Obama) versus fiscal prudence (everybody else), there are lots of articles about why our neighbors to the north avoided much of the 2008-2009 carnage. Well, by chance I was recently part of a political tour to Ottawa and Quebec, and have some answers.
The easy answer is that the Canadian banking system is more highly regulated, and that the government started from a position of strength, having run federal surpluses since the late 90s. I'll dig a bit deeper.
1. At a fundamental level, the Canadian constitution's founding principles of "Peace, Order, and Good Government" are pretty boring compared to our "Life, Liberty, and the Pursuit of Happiness." But the critical commitment to good government is real. When the International Monetary Fund censured Canada in 1993, Prime Minister Jean Chretien's Liberal Party responded not with tax increases, but with major spending cuts - slashing the government bureaucracy and cutting healthcare, among other things - and were rewarded with more than a decade in power. Our Republicans and Democrats both prefer the "pursuit of happiness".
2. Banking is more conservative, with banks actually holding the mortgages that they initiate and maintaining higher capitalization rates. There is no Fannie Mae/Freddie Mac being driven by a Barney Frank to enable mortgages for the unwashed masses - with an unlimited line of credit leading to a cost of $160 billion and accelerating. Rather than a global bank tax, the Canadians would call for spreading "best practices."
3. The central bank has a single inflation-fighting mandate (updated every five years) - currently, keep inflation rates at about 2%. Poor Mister Bernanke must try to balance conflicting dual mandates of price stability and (the more political) full employment, while overseeing banking regulation as well - a task handled by others in Ottawa. So, to muddle things more, the Congress is now adding a consumer protection agency to the Fed's portfolio.
4. While taxes and government spending are somewhat higher than in the U.S., much is paid for through provincial and federal "Goods and Sales" taxes which - unlike Europe's "Value Added" taxes are clearly itemized on the bills that the consumer pays. In addition to being visible, everybody pays - unlike the U.S. where the bottom half of income earners can demand more services to be paid for by "the rich".
With Obama's Budget Director, Peter Orszag, resigning in July, Pelosi announcing that there will be no legally-required budget resolution for 2011 (not wanting to highlight trillion dollar deficits before the election), and Obama continuing to be out of step with the rest of the world in advocating continued huge deficits, it is not surprising that the financial regulations making their way through Congress look more like the work of lobbyists than the "good government" folks. But November is coming, and perhaps the victors will have the wisdom to look north for some answers.
For those who believe in metaphors, this week's You Tube is of General Petreus' recent testimony before the Senate Armed Forces Committee - and that was before his key subordinate's Rolling Stone interview became public. If Obama didn't have the oil spill to distract us, the collapse of support for the Afghan War would be big news. (For what it's worth, I believe that civilian control of the military is a cornerstone of American democracy, and am amazed by General McChrystal's behavior.)
bill bowen - 6/25/10