the corner office

I'm wary of writing about economics and stuff, because Ronwen says she doesn't read these posts. That's half my audience gone. But I'll keep doing it because it interests me and because I think it'll be interesting to come back to some of these posts and articles in future, when this is all over, and the world has (possibly) ended up a really different place.

I've noted before that boring old not-free-market Canada has emerged from the crisis, relatively unscathed. One Canadian economist's opinion of why Canada hasn't been as affected:

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).

2. We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

My (admittedly uninformed) interpretation: Point 1: the Canadian government doesn't impose artificial constraints on where banks can do business. Point 2: the Canadian government doesn't impose artificial constraints on what a 'bank' can and can't do. Point 3: the Canadian government doesn't tailor its tax regime to make it easier for people to stay in debt. Point 4: the Canadian government doesn't have laws that make it easier for you to be irresponsible with your debts.

It is true that Canadian banks are regulated in other ways, but you have to ask exactly why 'free markets' and 'deregulation' are to blame for the credit crisis, when more freedom and less intervention are the reason Canada's not in so much trouble?

This has generated some discussion on the economics blogs I follow, and led to this comment on how respective governments approach bank regulation, by economist Arnold Kling:

In any case, back to the original quote, it gets to the distinction that I make between "letter of law" regulation and "spirit of law" regulation. I keep insisting that letter-of-the law regulation is bound to fail, because the natural impetus toward profit maximization will lead the banks to innovate in ways that are consistent with the letter of the law but violate its spirit.

Anyone who's had the displeasure of dealing with UK banks (or most UK corporates, for that matter), know exactly what that is all about.