"In Praise of More Primitive Finance"

Analysts, regulators, and politicians are beginning to recognize that most if not all of the widely touted benefits of modern finance redounded only to its purveyors. The decidedly retro Canadian banking system, with simple products, high equity requirements, and relatively modest securities operations that focus on domestic customers, is the soundest in the world. As Theresa Tedesco noted in the New York Times:

The five major chartered banks, the few regional banks and handful of large insurance companies are all regulated by the federal government. Canadian banks are relatively constrained in the amounts they can lend. Canadian banks are required to have a bigger cushion to absorb losses than American banks. In addition, Canadian government regulations protect the domestic banks by limiting foreign competition. They also keep banks broadly owned by public shareholders….

Canadian banks are known to be risk-averse, and this has served them well. While their American counterparts were loading up their books with risky mortgages, Canadian banks maintained their lending requirements, largely avoiding subprime mortgages. The buttoned-down banks in Canada also tended to keep these types of securities on their books, rather than packaging them and selling them to investors. This meant that the exposures they did have to weak mortgages were more visible to the marketplace.

The big five Canadian banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank of Montreal — survived the recent turmoil relatively unscathed. Their balance sheets remain intact and their capital ratios are comfortably above requirements.

Columbia University professor Amar Bhide, writing at the Berkeley Economic Press, endorses the idea of a reinstitution of simpler banking practices. The first part of his article offers an insightful, in many respects novel, critique of how we got in our mess. Bhide sees it as long in the making:

The financial debacle— the first to implicate the widespread use of complex financial instruments, rather than simple speculation or imprudent lending— isn’t just the result of the recent missteps of bankers, rating agencies or mortgage brokers. Rather, finance has been on the wrong trajectory for more than half a century. Its defects derive from the academic theories and regulatory structures that have evolved since the 1930s—dysfunctional foundations that have not drawn the scrutiny they deserve. And without addressing the deep defects, we are likely to lurch from crisis to crisis.

His recommendation is straightforward:

Reversing many age-old dysfunctions isn’t likely. We aren’t going to retrain business school processors in the art and science of traditional fundamental analysis or due diligence. Nor is repeal of the Securities Acts or the reprivatization of financial firms on the cards.

We could, however, go a long way to limiting future meltdowns by a simpler more primitive regulatory regime that keeps banks from enabling dangerous and opaque schemes.

Let’s revive the radical idea of narrow banking and tightly limit what banks (and any other entities that raise short term deposits from the public) can do: nothing besides making loans—after old-fashioned due diligence— and simple hedging transactions. The standard would simply be whether the loan can be monitored by bankers and examiners who do not have PhDs in finance.

Anyone else: investment banks, hedge funds, trusts and the like can innovate and speculate to the utmost, free of any additional oversight. But, they would not be allowed to trade with or secure credit from regulated banks, except through prudent loans whose collateral and terms can be monitored by run-of-the-mill bankers and examiners.5 This simple, “retro” approach—a more stringent Glass-Steagall Act—would protect depositors, limit the risks of financial contagion, allow the FDIC and Fed to focus on their primary responsibilities, and not require new agencies or more regulators. Less, would in fact, be more.

Speculations and bubbles would not be eliminated, but walling off the banking system would limit the extent of collateral damage. When the internet bubble burst, for instance, nearly half a trillion dollars of wealth evaporated. But because very little bank lending was involved the impact on the economy as a whole was modest.

Some would, of course, lose. Money market funds would lose their free ride—the howls of protest emanating from money market funds at proposed rules that they take some responsibility for their investment choices6 are telling. Financial engineers would lose access to cheap credit—alarming those who claim that the “sophistication” of the U.S. financial system is a prime cause of U.S. prosperity. But, although a modern economy does need the effective provision of some financial basics, such as risk capital, credit and insurance, claims that all the bells and whistles that have been developed over the last couple of decades are a net plus are implausible. Can we really believe that a financial sector now receives more than thirty percent of domestic corporate profits—double its share from twenty five years ago7—because it has produced improvements in mobilizing or allocating capital of that magnitude?

More likely, innovators and entrepreneurs in the real economy prospered in spite of the talent and funds that were taken up by the expansion of the financial sector. So if the financial sector shrinks back to the basics, so much the better for long run prosperity.

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  1. Anonymous

    Our banks are good. Scotiabank is probably the best (I hope, as I’ve been a customer for over 30 years).

    However, our provincial public pension systems are a total mess (CPP I think is OK). I refer you to the ongoing disaster:

    How did it all go so wrong at the Caisse?

    and to a slightly lesser extent the Ontario Teachers. The latter with it’s Nortel fiasco during the dot com thing, the former right now.

    Also, this country is a resource based economy so we will do no better (and likely worse) than the U.S. which has a far more diversified economy.

    So, our banks are OK. Big deal.


  2. Anonymous

    Arghh! I hate it when I mess up its and it’s.

    It’s = it is. I apologize.

    Chris (the polite Canadian).

  3. Anonymous

    The US president was quite clear that credit and lending need to be restarted if the US economy is to weather the downturn. Following Canadian lending rules in my opinion would completely halt the US economy, in fact following the lending rules of any country outside the US might completely destroy the US economy. Perhaps this is a rash claim but the evidence is pointing that way.

    Let us start by looking at the differences between mortgages in Canada and US. Lending more than 80 percent of the value of a home is restricted in Canada, all mortgages are recourse, equity withdrawal is limited, there is no tax allowance, income multiples are thoroughly checked and bankruptcy is not a trivial matter with bankrupts barred from credit for a long time. If I had to pick the major reasons for the differences in the markets then it would be that mortgages are recourse, bankruptcy is non trivial and there is no tax incentive not to pay off the mortgage.

    Next lets look at another news item over the weekend which was the news that HSBC made big losses from its US business and will cease to provide mortgages in the US. This perhaps should read HSBC continues to lend in Canada, Mexico, Japan, Hong Kong, China, Taiwan, Malaysia, Korea, Germany, Russia, Hungary and just about anywhere except the US. Its not as if this comes as a big surprise after Michael Geoghegan’s outburst in November critising the state-sponsored bail-outs. He said ” there is no question that guarantees have been given to failed managements, adding that they risked distorting the market”. HSBC have lost nearly 30billion from mortgages in the US and the question is how big was the portfolio (62 BILLION 2002 ?).

    The question then becomes can the US afford narrow banking and tightly limited banks. How long before JPMorgan decides it can not afford the losses in the US and moves to Germany. I cannot see the problem being resolved until non recourse mortgages are banned and market distortions due to taxation are relinquished. Lending in the world is going one way and US lending is going another, which just another imbalance which will eventually correct itself one way or another.

  4. mmckinl

    The Central Bank in Canada was nationalized in 1936 …

    They are there to promote stability, not pad their shareholders profits like our privately owned and operated Federal Reserve Corporation.

  5. Anonymous

    Traditional arrangements did not become ‘traditional’ because they didn’t work so ‘innovation’ in such
    tried and true fields as banking need to be treated with serious skepticism.

    Today’s bankers are no smarter than those of the past so to imagine they can invent a superior
    system than that what experience created is foolish.

    Let the innovators use their own money to play with.

  6. brushes9

    Click “brushes9” above to watch Dean Baker embarrass Megan McArdle. Read thse comment too. Here is mine:

    A libertarian analyzes the world based on reason, not emotion. But, before anyone say that that is a good thing, imagine the emotion-less activity of BTK, the serial killer. Reason, without emotion, is sociopathology, verging on psychopathology (ie, BTK and Ayn Rand, and the “person” of The Corporation).

    Anyone who has studied Ayn Rand knows that she believed emotions to be weakness.

    In the interview, do Megan’s sentences and arguments sound disjointed, similar to output from an AI prototype? That is because only emotion allows us to humanely organize our language output, something AI machines cannot yet do. Through emotion, we can poetically organize our thoughts by properly feeling where each word should go, and which argument should follow next,..we are efficiently measuring each and every meaning, putting everything in its proper place. Megan, apparently, is emotionally constrained, or handicapped, to put it mildly.

    So, the WPA built many good things, but also extended the lives of many people who, otherwise, would have died. This latter point, Amity Schlaes, nor Megan McArdle, would understand, because they are just dusted off, articulate and salaried sociopaths, or psychopaths, of course, not surprisingly, similar to the modern day corporation.

  7. Ginger Yellow

    “The big five Canadian banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank of Montreal — survived the recent turmoil relatively unscathed. Their balance sheets remain intact and their capital ratios are comfortably above requirements.”

    While this is true, it glosses over a pretty huge point. Canadian banks were up to their eyeballs in ABCP conduits, just like the US investment banks and countless European banks. Unlike those banks, however, in Canada, their differently worded contracts allowed them to wriggle out of their liquidity commitments to their conduits (much to the ABCP investors’ surprise and consternation). If it hadn’t been for that, their balance sheets wouldn’t look so pretty. I still don’t understand quite why their calculation of reputational risk was different from the SIV sponsors who had no contractual obligation whatsoever to step in (beyond a tiny fraction of the outstanding CP), but apparently it was.

  8. Anonymous

    The five big Canadian Banks all pushed for the same US type “deregulation” a number of years ago. Fortunately, this was opposed by such a significant amount of voters that they backed off. So, these systems are very FRAGILE. (It was also a near political miss Canada going into the IRAQ Debacle, though they are on board for the Afghan Disaster.)

    Keep in mind also that that Bank of Canada is now run by a GOLDMAN guy, evidently there are no home grown Canadians up to the job. GOLDMAN prime suspect in the World Financial Disaster is good work experience to be a central bank flunky.

    Lastly, the current Prime Minister Steve “Adolph” Harper is a neanderthal neo-conservative who wanted, as only one example, to assist the US in its IRAQ War Crimes Project. He is a student of Gingrich and many of the other right wing kooks in the US. He still mouths and proposes much of the discredited US conservative hoodoo and bunkum. His current project is to jump start the US Prison Industry here in Canada. Other project is to destroy Universal Healthcare. The fact that this guy still can market such neocon claptrap is remarkable.

    So, one must be ever vigilant opposing these Political Primitives even more so in difficult times.

  9. vlade

    Banks should be utilities. In fact, I’d argue that there should be two version of the utility banks (leaving all the investment zoo out) – one which takes deposits and lends it out (and has no deposit insurance whatsoever, but depositors get reasonable interest and pay no fees), and the other where the “deposit” is in fact a bailment (i.e. possession still remains with the depositor, not transfered to the bank as it is now), and the institution is effectively just an electronic clearing house (i.e. doesn’t lend, and makes money on fees and possibly on CB depo rate vs. interest rate paid – if any). This clearly separates the risks (can loose deposit/makes better returns, can’t loose deposits, makes smaller, if any returns).

    The problem is the entitlement feeling – people are rarely, if ever, willing to go to perceived “worse”, even if it protects them from a black swan. Of course, only until black swan shows up in their swimming pool.

  10. Anonymous

    Well considering how often American policy influences Canadian policy in all walks of life – politics, business, entertainment – good for the Canadians for not taking this Americanism with them. The banks there will have a weaker and less prosperous U.S. to deal with and they can maybe take financial advantage when things near a bottom. RBC is already in North Carolina, having bought regional bank Centura around five years ago. Correct me if I’m wrong but I think Scotiabank is looking at expansion as well.

  11. Independent Accountant

    I’ve advocated “small” banking for years. The repeal of Glass-Steagal was a mistake.

  12. Anonymous

    Banking needs to become boring again. In that sense Canadian policies are good ones to adopt. But I think the hyper-consolidation would be bad in this country, both because this country is just way too big, and because big companies in this country tend to be extremely sclerotic and centralized, meaing the high-touch banking that small and medium businesses need would get squeezed out.

    Anyone else: investment banks, hedge funds, trusts and the like can innovate and speculate to the utmost, free of any additional oversight. But, they would not be allowed to trade with or secure credit from regulated banks, except through prudent loans whose collateral and terms can be monitored by run-of-the-mill bankers and examiners.

    I think this idea is good as far as it goes, but it doesn’t go as far as the author thinks. There are huge pools of capital sloshing about inside pension funds and the like, all desperately chasing yield. IBs and HFs could still put the economy at risk if they get access to the pensions funds or other large sources of capital.

  13. Lucifer

    canucks are lying… they are just as exposed to CDS and other exotic instruments. Not acknowledging exposure is not the same as not having exposure.

    They probably have a much higher exposure than the 800 billion they have acknowledged.

    Canadian banks stuck with more than $800B in credit default swaps

    Posted: September 16, 2008, 1:00 PM by Drew Hasselback

    Amid the ongoing credit crisis few investment instruments have fallen out of favour as much as credit default swaps, and that is becoming a problem for Canadian banks that hold them.

    In a note put out this morning, RBC Capital Markets analyst Andre-Philippe Hardy estimated that the Big Six hold about $832-billion of credit default swaps.

    Hardy said some of those positions may be in trouble because of the collapse of Lehman Brothers and the potential failure of the insurance giant AIG, both significant players in the US$62-trillion global credit default swap market. Dealers in the U.S. and the U.K. have voted to delay rollovers in the market due to the turmoil left by the Lehman collapse.


  14. Gentlemutt

    Eventually the USA will resolve its problems with finance with a combination of credit unions, smallish community banks, and 3-4 international banks.

    The real inter-generational crime fostered by Greenspan’s merry men was the linkage of basic bank deposits and limited leverage lending with the rapidly over-inflated sea of virtual financial products. That link is dying now.

    Gonna be a few years, though. Dreams of instant effortless wealth don’t die easy. And Mayor Crime Scene in NYC won’t give up without a fight.

  15. Don

    Since I’m pushing this idea, here’s another good post from the FT:


    “This limited purpose banking is a modern version of narrow banking proposed by Frank Knight, Henry Simons, and Irving Fisher. Banks would hold deposits, cash checks, wire money, originate loans, and market mutual funds, including money market funds with no guarantee of par value redemption.

    With limited purpose banking, financial crises would largely disappear. Banks would never fail, never stop originating loans, never expose the public to massive liabilities, and never see their stock values evaporate. Banks would be stable, boring economic cogs – like gas stations.

    The Fed would also gain full control of the money supply. To expand the money supply, the Fed would continue buying treasuries from the public and supplying cash. But banks wouldn’t be multiplying and contracting M1 (cash plus demand deposits) based on their ever changing decisions about lending deposited funds.

    Milton Friedman, who also advocated narrow banking, blamed the Depression on the Fed’s failure to offset the M1 money multiplier’s collapse. In the past year the M1 multiplier has contracted by over 40 per cent, forcing the Fed to double base money. If the multiplier shoots back up, we could see the money supply and prices explode.

    What about investment banks, brokerage firms, hedge funds, and insurance companies? What’s their right financial order?

    Again, regulate to purpose. Investment banks take companies public and assist in mergers and acquisitions. They shouldn’t be permitted to invest in their clients’ companies. Brokerage firms are here to help us buy and sell assets, not to gamble on spreads. Hedge funds are here to help limit risk exposure. They aren’t here to insure these risks themselves. Finally, insurance companies are here to diversify risk, not write insurance against aggregate shocks.

    The FFA and “less is more” limited purpose banking won’t prevent asset markets from occasionally going nuts. But the functioning of financial markets will no longer be in question. Nor will con artists, parading as “financial engineers,” ever again be free to wreak havoc on the nation’s finances and its citizenry.

    Christophe Chamley is a member of Boston University and the Paris School of Economics. Laurence J. Kotlikoff is professor of economics at Boston University”

    Read the whole thing.

    Don the libertarian Democrat

  16. macndub

    With so much misunderstanding about Canadian banks, I shudder to think how little Americans must understand about really foreign countries.

    First of all, there was a housing binge in Canada too. Zero down, 40 year amortization mortgages were common during the bubble years (2006-8). Mortgage insurance, though, is federally guaranteed, and a quick back-of-the-envelope puts the federal liability in excess of 4% of GDP. Very little media attention on this.

    So the banks are relatively more stable (and they did plenty of securitizations, too), but it’s because the government will explicitly bail them out of some of their worst decisions. Plus they have instituted a whole pile of facilities, “Just in case… oh, we’ll never need these, just being cautious.” Yeah, right… readers of this blog know how that goes.

    A previous commenter addressed the hole at the Caisse… it amounts to 2% of GDP for now. And they will likely take an additional C$10b on asset-backed commercial paper.

    The bottom line, though, is that 80% of Canadian exports go to the US, and up to half of those exports have been energy recently. No longer. It won’t look as bad in Canada as in the U.S. or Japan, but it will still be pretty bad.

  17. Anonymous

    Canadian banks do their dirty work with subsidiaries in offshore, hidden places.

    Real estate loans in Canada is the danger area, both residential and commercial properties are way out of line with reasonable metrics on pricing, affordability, etc.

    In metro Toronto, CAD $300 to $400 a sq. ft. is common.

    Watch for this movie to end like all the other Anglo-Saxon financial institutions.


  18. tony

    I vaguely recall that the state of Texas only allowed each bank to only have one location. They may have been on to something.

  19. doc holiday

    Re: "Let’s revive the radical idea of narrow banking and tightly limit what banks (and any other entities that raise short term deposits from the public) can do"

    >> That should be FUCKING easy after Paulson and all the current regulators burn America to the ground:

    The Federal Reserve, in an attempt to prevent the crisis on Wall Street from infecting its two premier institutions, took the extraordinary measure on Sunday night of agreeing to convert investment banks Morgan Stanley and Goldman Sachs Group Inc. into traditional bank holding companies.

    As a bank-holding company, Goldman Sachs would become the fourth-largest such company in the U.S., behind Bank of America, J.P. Morgan Chase & Co. and Citigroup.

    These actions "constitute a powerful statement by the Federal Reserve as to its views on the safety and soundness of these institutions," said H. Rodgin Cohen, chairman of the Sullivan & Cromwell law firm and a top adviser to financial institutions.

    Instead of being overseen just by the Securities and Exchange Commission, Goldman Sachs and Morgan Stanley will now face much stricter oversight from numerous federal agencies. The Federal Reserve will regulate the parent companies, the Comptroller of the Currency will oversee the national bank charters, and the Federal Deposit Insurance Corp. will likely play a bigger role ….

    he most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage. At Merrill Lynch, the leverage ratio soared to 28 last year, from 15 in 2003, according to UBS. Morgan Stanley's leverage ratio climbed to 33, while Goldman's hit 28.

    >> Total fucking corrupt BULLSHIT! By all means, allow these fucking pirates to co-mingle derivative casino chips with brick and mortar commerce — yes, by all means, allow accounting fraud cancer to get deeper into the fucking system!

  20. Mencius Moldbug

    While it’s great that people are talking about “narrow banking,” that phrase is becoming stretched so wide that any number of camels will fit through it.

    Take Kotlikoff and Chamley at the FT. In one breath, they say:

    To safeguard the payment system, banks must hold 100 per cent reserves against their deposits either in cash or short-term US treasuries. With 100 per cent reserves, bank runs will be history.

    Applause! (Especially if we lose the “short-term Treasuries” – cash being a zero-term Treasury. Since USG can barely move its pinky finger in 90 days, it’s unclear what projects it would want to finance at this maturity.)

    But in the same post, we see:

    Banks should be allowed to initiate only conforming, i.e., government-approved, AAA-rated mortgages and business loans. These would be long-term, fixed-rate loans with 20 per cent-down and payments below 25 per cent of income.

    Perhaps there is something clever going on here with the words “bank” and “initiate.” Or perhaps Messrs. Chamley and Kotlikoff are not quite in agreement on this point.

    In any case, the term “narrow banking” has historically meant banking without maturity transformation: ie, a bank must match every liability which matures at time T with an asset that matures on or before T.

    Eg, deposits must be backed by cash; annuities can be backed by mortgages; etc. Rocket science this is not. The hard problem is the transition, not the endpoint.

  21. doc holiday

    I can’t let it rest, I tried, I went back to other things, but after seeing yet another plunge in the market, this AIG story is like watching a coke mirror held up before society — and as we watch our dope pusher government in horror, deliver yet more cocaine to the growing list of AIG-addicts, that all need more buzz juice — when the fuck is this gonna end?

    Where is the accountability and the connection to reality? I have no doubt that the long-list of retarded people that are making this shit up as they go, at Treasury, The Fed, and deep inside The Obama Dream Team — will spit out yet another on-the-fly burst of stupidity which will turn AIG into a bank holding company, which will have strict oversight, because as we all know, we can trust all these people, from The Dream team, right down to the whores that are giving The CEO’s gold dust facials in Tucson resorts.

    This is where we are now, corrupt government and a period of unaccountability; this does end well, but Carpe diem! Enjoy!

    Caligula’s first acts were said to be generous in spirit, though many were political in nature. To gain support, he granted bonuses to those in the military including the Praetorian Guard, city troops and the army outside of Italy. He destroyed Tiberius’ treason papers, declared that treason trials were a thing of the past and recalled exiles. He helped those who had been harmed by the Imperial tax system, banished certain sexual deviants, and put on lavish spectacles for the public, such as gladiator battles. Caligula also collected and brought back the bones of his mother and of his brothers and deposited their remains in the tomb of Augustus.

    In 40, Caligula began implementing very controversial policies that introduced religion into his political role. Caligula began appearing in public dressed as various gods and demigods such as Hercules, Mercury, Venus and Apollo. Reportedly, he began referring to himself as a god when meeting with politicians and he was referred to as Jupiter on occasion in public documents. A sacred precinct was set apart for his worship at Miletus in the province of Asia and two temples were erected for worship of him in Rome.

    The contemporaneous sources, Philo of Alexandria and Seneca the Younger, describe an insane emperor who was self-absorbed, angry, killed on a whim, and who indulged in too much spending and sex. He is accused of sleeping with other men’s wives and bragging about it, killing for mere amusement, purposely wasting money on his bridge, causing starvation, and wanting a statue of himself erected in the Temple of Jerusalem for his worship.

  22. MyLessThanPrimeBeef

    I am all for keeping it simple, smartie, or KISS.

    Along the same line of thought, I also prefer using less energy, over more spending for clean energy.

    There are no special interest groups promoting ‘Less Use,’ but because some people benefit from the shift from one form of energy use to another, we see special interest groups, while seizing moral vantage points, try to disguise their greed behind their perceived public virtue.

    Why is ‘clean energy’ another false promise? It has to do with progress in general. Internal combustion engine was once some romantics’ ‘progress,’ but just look at what it has turned into today.

    OK, what is wrong with solar energy, you might ask, for example? Well, one solar panel is cute and makes your the leading conscience of your neighborhood, just as one auto down the winding country road back in the 1920’s was cute. But a billion solar panels, and you will hear news reports of dying garden critters because scientists (i.e. the bad guys, who along with dismal scientists known as economists who brought us the current end-of-the-world Big Crunch and therefore can’t not be the solution, just as debt got us into the mess and therefore more debt is not the solution) suspect that the energy that normally bounces off roofs and walls and heats up the surroudning areas has been diverted into solar storage cells. And wind patterns will alter drastically as areas with concentrated solar panels see their ambient temperatures drop; for example, metropolitan areas with huge numbers of solar panels see their urban temperatures lowered. This is why scientists can’t be the solution to the environmental problems since they are the cause of them. Again, just like as debt is the problem, more debt is not the solution.

    In any case, cars themselves are not the problem but when there are too many. And solar panels are not going to be the problem, but when there are too many of them.

    But there is one simple solutin. That solution will not make anyone a billionaire, will not generate more jobs and will not be the answer to someone’s ‘now that I have a degree, what can I do with it’ question, because number one, a good educator will teach his student that one learns for the sake of quenching his thirst for knowledge, not for building a career. And therefore, no one is promoting that idea. But it’s really a simple, elegant solution – regarding your life, keep it simple, smartie and just use less of everything.

    And remember this semi-quasi-mini-haiku:

    Today’s progress
    Tomorrow’s mess!

  23. MyLessThanPrimeBeef

    Caligula wasn’t much different from Nero, I suppose, who also started out keen on being a good ruler.

    In fact, the Ming Chinese emperor Wanli was once a competent Son of Heaven in his youth until he decided one day not to attend court anymore. He kept it up for something like 40 years and when Matteo Ricci, sent by the Pope, went for an imperial audience, the Jesuit was instructed by the eunuchs, as a normal routine, to bow to an empty dragon throne.

    Take it from this Beverly Hills Messiah Finishing School dropout, don’t trust anyone over 30 nor under 65.

  24. JO

    Hi Yves, I have spent my career in financial services and lent money in Canada for years..I have seen so much press on how our banks are clean, etc..I think many in Canada and outside of Canada are getting an impression of spic and span clean about our banks…i need to say: I do think we will continue to be relatively better off compared to the US banks and especially the Euro ones..BUT..we will not be able to make a more valid assessment on our bnaks until mid 2010 onward. Our RE cycle is about 2 yrs behind the US and econ cycle slightly behind..yes our banks are modestly less leveraged and have higher cap ratios, but we still have a record amount of consumer debt, many buyers in 2004-2008 that used the 0 down / 35-40 amort products, and our lending, while probably moderately better on average in terms of income, etc, is still not rock solid. So bottom line, I will be watching the CAD banks very closely after summer 2010..we will do better compared to others but I still expect serious issues (above average loan losses / reduced divs/). I like the author’s recommendations on banks, but leverage needs to be reduced significantly below current levels (phase in over a few years) and we need to tighten up on gov’t insurance home buying programs which put too many weak/marginal borrowers into homes wrongly.

  25. Keenan

    doc holiday, your rants place you in strong contention for the Howard Beale chair in the Department of Outrage at nakedcapitalism U. Although your metaphoric reference to metastatic cancer accounting is indeed accurate and comprehensible to adults, perhaps a different analogy is needed to explain it to the kids who are, after all, saddled with the ultimate resolution of this mess.

    Since it’s Dr Seuss’ birthday as noted on the Google site, I propose a new edition of the children’s classic The Cat in The Hat Comes Back…. Greenburg, or one of the other perps, the chapeaued feline who caused the pink stain of bad paper; Bernanke, Paulson, Geithner, etc. as Little Cats A,B,C, and so on … pretending to clean up but making it worse; and then finally Little Cat Z, so tiny he’s almost invisible – just like those yet to be born taxpayers – with the super stain remover VOOM to make it all better.

  26. MyLessThanPrimeBeef

    I forgot to mention one more thing. We as a society has to start to value more the ability to understand simple things over the ability to understand complex things.

    For example, you might know how to design a complex nuclear bomb, but fail to understand the simple fact that nuclear bombs are terrible thing for the world as a whole.

    Or, you might know how to manufacutre complex machines like a clean car, but fail to understand that the more cleaner cars you have, the greater the total-mileage we put on our cars to the extend that there will be more carbon emission – how? It’s like the law named after the Intel guy – the cheaper you charge for computing power, the more total revenue Intel makes because the demand increases to the extend as to actually compensate for the lower revernue per unit sold. That paradox will happen with lower emission cars and total carbno emssion.

    Also, you might be able to design complicated financial mass weapons of destruction, you can fail to a simple rule like, ‘don’t play with dangerous things.’

    To wrap up, we should start to treasure our child-like ability to understand simple things, and not our adult-like ability to understand complicated things.

    A guy, sorry, or a gal, who can understand simple things should be worth a lot more than a guy or a gal who can understand complicated things.

  27. canamerican

    As an American/Canadian living now in Canada. And also having $1mil + tied up in the Asset Backed Commerical Paper fiasco in Canada, I would venture to guess Canadian Banking is on par with American. The Canadian Gov. loves to spout this retoric, but given time the ecomomic downturn will hit Canada as hard or harder than the US.

  28. doc holiday


    I come here tonight a shell of what I once was (not that I ever amounted to anything) battered by the day and challenged by the night, yet, I crawled here again, thinking I could get away from financial misery and turn the clock back to a time, when I could relax. The rants are wearing thin and my anger has turned to mush. Maybe I need to just go back to basics and shut up, but it is hard to escape the DNA of Howard Beale or Suess, as we all watch this run away freight train hit the wall. The good news, is that at least we know where it’s going (hehehehe)!

    This place here, in pixel hell used to be like a kind of cool old bar at one point, where only a few poor slobs drifted in now and then, while Yves served up re-heated stories and kept pounding away at the cracks that were growing wider. Many a time, there were no comments here at all and then at some point, the cute photo stuff was added in, as if by magic; I remember having to ask for it on some nights. Then, somewhere back in memory lane, Yves went off to Alaska, and the rest is history; there are rumors that she never came back and is still there, frozen in time, but obviously, it doesn’t matter a bit, because everyone has lived happily ever after …

    Nonetheless, it’s a battle just to get in here now and yah wonder if you should even be hanging out, crying in yer beer — and that reminds me of U2 for some reason: I never bought a Lotto ticket
    I never parked in anyone’s space
    The banks feel like cathedrals
    I guess casinos took their place
    Love, come on down
    Don’t wake her, she’ll come around
    Chance is a kind of religion
    Where you’re damned for plain hard luck
    I never did see that movie
    I never did read that book
    Love, come on down

    > Next Slide Please >>

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