The upside of being a nice but boring country

Canada has the soundest and safest banking system in the world

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The Gazette, Wednesday, April 1, 2009

Leaders of the G20, representing 80 per cent of the world's economic output, are gathering near Canary Wharf in London in the hope of reaching agreement tomorrow on the next stage of a global plan for recovery from a recession triggered by a bubble in real estate and financial services.

Well, Canary Wharf is the very symbol of success and excess in both real estate and banking, a reminder of another bubble that burst.

When Canary Wharf was being built by Canadian developers, the Reichmanns of Toronto, it was audacious and breathtaking in every way. When it broke ground in 1987, it was conceived as the biggest office project in the world, with two dozen buildings around a trio of high rise towers. But at the time there was no Underground to the site in the Docklands of East London and the banking industry liked its home in the old financial district, the City.

In the wake of Margaret Thatcher's Big Bang, opening British financial services to the world in 1986, it was left to foreign banks to occupy the expansive new space. But then the stock market crashed in October 1987, the real-estate boom went bust, and $10 billion later, the Reichmanns lost the project to the banks in 1992, before getting it back three years later.

Things got better, but they were never quite the same. Except that the forces of globalization in financial services, unleashed by the Big Bang, had unforeseen consequences. Like some kind of computer virus, all these derivatives and commoditized loans have raced through the global financial system, and caused a crash in the real economy.

When Canary Wharf was being developed, and financial services being deregulated worldwide, no one foresaw the demise of common sense in the rush to globalize services. No one foresaw that Icelandic fishing boaters would become investment bankers, or that Icelandic banks would buy banks on Canary Wharf, and that those London banks would guarantee mortgages in Florida and Arizona real- estate developments that those erstwhile fishing captains had never seen.

As a result, we have the Icelandic model, a little nation that didn't know what it was getting into, and which today finds itself with a worthless currency, and a national debt-to-GDP ratio of 850 per cent.

It turns out that the international financial system, with money chasing money, has become a legalized Ponzi scheme. And now we are in the reckoning, with Washington nationalizing Wall St., in a way Marx and Lenin could never have imagined.

Yo, Canada!

There is something to be said, after all, for being a nice but boring country, with a boring but nice banking system. There is something to be said for prudence in lending, something to be said for knowing what the customer is doing with the money, certainly not borrowing on a mortgage free of down payment to buy a car.

There is something to be said, indeed, for having the soundest and safest banking system in the world, as Canada is ranked by the World Economic Forum, with Switzerland ranked 14th and the United States 41st (and that was before the $700-billion Bush bailout, not to be confused with the $1-trillion Obama rescue plan).

Which gives Canada and Stephen Harper serious standing, and serious money, in the G20, which Canada played a leading role in founding at the finance minister level in Paul Martin's time. Normally, as a G7 country, Canada is the smallest and least influential player, the guy that comes with the United States. And indeed, if Barack Obama is looking around for a friend tomorrow, Harper won't be far away. (They're already on the same page in terms of tough love for Detroit and the North American auto industry).

So what is Canada looking for at Canary Wharf?

First, fix the banks. Easier said than done. All these toxic assets have to be taken off the banks' books. Central banks have pumped cheap liquidity into the system, but banks aren't lending yet, confidence hasn't come back yet, and demand isn't pent up yet. Restoring confidence is the first job for G20 leaders. And that comes from competence.

Then, re-regulate national banking systems,and create viable international standards and financial frameworks. The boring Canadian model, including high loan loss provisions, and 20 per cent down payments on housing mortgages, are two examples of prudence. This was all so avoidable.

Finally, G20 nations should be held to their commitment in Washington last November to provide budgetary stimulus equivalent to two per cent of GDP. They should also be reminded of their pledge to avoid the siren call of protectionism. The Canadian Council of Chief Executives, in a letter to the PM, cites World Bank research indicating 17 countries are not keeping their word.

And how is Canada doing? The Wall Street Journal ran a G20 stimulus scorecard showing Canada doing more across the board than all but Germany, and falling into protectionism only on the auto bailouts.

No bank bailouts, though. Only profits.

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