Sometime ago, before the current financial crisis and credit crunch, I got into a heated argument with a Canadian friend about our countries’ respective banking systems. He was begrudging the fact that in Canada as he put it, “the banks have the right to make money.” As an American, I looked at him like he was a Cassandra. “Perhaps the banks have the right to make money in Canada,” I said, “but in the US they have the right to print money.”
Banking is banking in Canada, and making money is perfectly fine so long as you pay your tax and obey the law. Perhaps it is our proximity to the US that allowed us to have the proper distance to predominately say: HOGWASH to the American uber-derivitization of the banking culture. In the rest of the world however this American culture of outsized derivatives grew to permeate (and then explode) the banking world, and today we are all still picking up its shattered pieces.
There was a spectacular degree of leverage due to the rise of the derivative culture in the United States under George W. Bush, and even under Bill Clinton in the latter part of his tenure- especially when you figure in the credit default swaps marketed by the insurance industry. When the going was good, and people could flip their homes for capital gains, everyone got rich, including the government taxing those capital gains at a good clip; but when the price of housing came back to earth, the banks (and the US government) were not prepared. Because there was no actual money in the crooked (and today foreclosed) system.
I had an acquaintance in New York who was a very high up player in the derivatives game at Citibank. He broke it down for me in the following manner: He said that China needed the United States more than the United States needed China due to the fact that China held so much US debt. (I didn’t buy this-it seemed ridiculously simplistic). He told me that people are still coming to the United States to look for the American Dream, to look for the big house with the two-car garage. He said that people are still sacrificing their entire histories in order to pursue this dream, and that is why engineering these derivative products of mortgage securities made so much sense. He even got so crude as to say that people still go to see the silly movies about the American Dream, so this too could only mean that of course the derivatives based on the pursuit of the American Dream are bankable. He was globe-trotting to sell Citibank debt the world over with these lines about the infinite financial powers of Renee Zellweger and Jim Carrey.
That was three years ago. Citibank has since lost hundreds of billions of dollars (and counting), and needless to say, this man (a once highly regarded mathematician who graduated from the University of Chicago) no longer has a job.
As he told me when the Citibank ship was going down last year: “No one is safe.”
The hoopla today is that Canada has the healthiest banking system of any developed country. While this should be a source of pride for us, it makes one wonder, what is really going on in the rest of the world? Because things aren’t so great here in Canada. It’s difficult to get credit; if we try to save money, the interest that we earn in our savings account is paltry. Unemployment is high and rising yet the rest of the world is now (it was decided at the G20 meeting in Pittsburgh last week) trying to mimic the Canadian banking system, due to its apparent successes at weathering the storm. July´s GDP growth was non-existent. But when you look at this more closely, you realize just how bad it must really be out there in the rest of the developed world. (However it is true that Canada’s banks have not had the colossal losses and failures seen elsewhere.)
An interesting fact about the Canadian banking system is the following: Our system of negotiating and setting mortgage terms is the very same system used in the pre-Depression United States. Today the major difference between mortgage terms in the United States and in Canada for homeowners is the following: In the United States you can take out a fixed rate mortgage for up to and including 40 years. In Canada if you want to have a good interest rate on your debt, it’s generally not possible to go beyond a five-year term (amortized at up to 35 years) at a fixed rate, at which point you then have to renegotiate your mortgage with the interest rate of the present day. Furthermore, the interest you pay on your home mortgage is tax deductible in the US, which is not the case in Canada. Therefore the US incentivizes home ownership through leveraging the banking and tax system in its favor.
In Canada on the other hand, if you want to mortgage your home then it is your right, but you will have to be on your toes (due to the tax burden and short term interest rate) and the banks have more flexibility to be on their toes, too (due to the shorter mortgage terms)- certainly to a much greater extent than those banks in the United States locked into decades long (tax incentivized) deals with nearly all of their mortgager customers (the bulk of most banks’ businesses).
No, Canada never jumped ship from that original model, and in that the system is indeed conservative. Mortgaging is something that happens in geologic time and paradoxically, the shorter terms we use here, and the real tax burden serve to stretch out the home-ownership and mortgaging experience into something far more robust than the time machine model they have down south. This is why Canada never got carried away to the same lengths with uber-derivitization of the business culture seen in the US and elsewehere.
Indeed, some of our Canadian banks here were sold some of the bills of goods by Citibank et al. but none were big players in the shell game a la Iceland. And although the G 20 wants to mimic Canada’s system, it seems somehow too late for those other systems to go back- the cultures have changed. An argument can be made that no one is as civilized.
Like any large economy, Canada has fallen victim to some modern fraud. In many cases this fraud is egregious. However, going back to my argument with my Canadian friend, while there are cases of individual fraud in Canada, the larger systemic fraud that was the uber-derivatization of the business (and home-owning) culture in the United States and beyond was far more insipid and insidious than anything we’ve had to experience here in Canada, and for this we should be thankful, and (cautiously) proud.
