01
Nov
2011
An Interesting Zinger From Tom Woods
I’m sure this is partly confirmation bias, and that the regulators amongst us will hasten to point out the flaw in the argument. But anyway I really liked this zinger from Tom Woods (HT2 Robert Wenzel):
The Glass-Steagall-did-it crowd is the same crowd that likes to claim Canada avoided the worst of the U.S. crisis because it was so much better regulated. But they can’t have it both ways — Canada did not have a Glass-Steagall law!
Sowell explains this discrepancy from the fact that Canada allowed branch banking while the US prohibited it. Canadian banks had more diversified risks, whereas banks in the US was more vulnerable to specific shocks ; eg. a bank located in Texas would be more vulnerable to a drop in the price of oil, etc…
Conversely, a bank with multiple branches can simply transfer funds from those branches with surpluses to those with deficiencies, reducing the risk of a devastating bank run
Where does Sowell write this? Not questioning that he did; I’m just interested in reading it (I’m writing a review of a book that deals with the same topic). Thanks!
Jonathan I think Milton Friedman talked about this first (but I could be wrong). Anyway I discuss it in my PIG to the Great Depression, if you have that handy.
Also everyone, Tom isn’t talking about Canada in the early 1930s (which is what Sowell is talking about). Tom is saying that right now, critics of the Clinton/Bush “deregulation” of the financial sector point to Canada as being very prudent during the housing boom years, because of their crack government regulators. So Tom is pointing out (I assume this is correct) that Canada didn’t have an analog of Glass-Steagal in operation from 2000-2007, so how can it be claimed that the repeal of Glass-Steagal allowed the US housing bubble?
Well, the obvious rejoinder — and I have no idea if it works or not, as I know nothing about Canadian banking — is that Canada had other good regulations in place. So, given the lack of other good regulations in the US, the repeal of Glass-Steagal was catastrophic, but Canada never even needed Glass-Steagal, given their otherwise excellent regulatory regime.
As I said, I have no clue if this is true, but it is the obvious comeback.
Gene sure, I’m wondering what those specifics things would be. Such people can tell us with absolute confidence that it was the removal of Glass-Steagall that “did it” here, showing they have an intricate understanding of all the relevant legislation and the marginal incentives each component provides.
E.g. a lot of right wingers reflexively blame the whole thing on Fannie/Freddie and CRA, just because they “know” that government intervention must be at fault. Krugman et al. like to argue that that doesn’t quite add up, and Tom in his books also says theoretically that can’t be the whole story.
In contrast, I’d like to say I really did give a lot of empirical evidence at Mises.org that we’re not just reflexively saying “housing bad, Fed did it, kill Greenspan!”
Gene,
Being Canadian, and having some knowledge of the Canadian bank structure, I can suggest a couple of ‘good’ regulations that were in place.
The first is that banks have always been able to branch out, so they are able to geographically diversify.
The second is that since there has never been a Glass-Steagal type law, so banks can diversify across asset classes.
A couple of other important ones, include no Fannie/Freddie guaranteeing mortgages. There is the Canada Mortgage and Housing Corporation (CMBC) which insures mortgages, and this allows down payments as low as 5%. Basically, it seems CMBC = FHA, but with somewhat higher standards.
The last thing, and I think this is pretty important, is that mortgages in Canada are adjustable rate loans, where the rate locks in for 5 years at a time. Allowing banks to pass interest rate shocks on avoids S&L-type crises.
Btw, Canada is a Basel II signatory, and since 2007 Canadian banks have been Basel II compliant, so I don’t think there’s a big difference coming from capital requirements. And there is no reserve requirement.
I thought those laws were largely repealed too.
Ya my bad Sowell was talking about the Great Depression, when the US had thousands of bank failures but Canada had none. But for reference’s sake, I found it in the 5th chapter of “The Housing Boom and Bust”
The good ol’ flaw of mixing necessary and sufficient conditions.
Don’t tell me Tom Woods has a PhD too.
Sounds like someone has major self-image problems. Got rejected from grad school? I’ve never seen someone more sour about others having PhDs.
Speaking of necessary and sufficient conditions, it is necessary that you find a way to escape the implications of Canada not having a Glass-Steagall type law, or else your prior claims are sufficient in showing that you are clueless.
PhDs must be the only thing that has lost value more than the US dollar in the last 100 years.
Well, IMO, there is an education bubble.
I had an inkling that something was amiss when my former alma mater started offering courses on The Beatles.
Tom Woods has a Harvard University (B.A.) and Columbia University (M.Phil., Ph.D.).
He wrote the definitive book “Meltidown” about the 2008 crash which you would be unable to comprehend.
http://tinyurl.com/3b4lfho
He’s got a PhD! I knew it!
From now on, in response to Mammouth’s inciteful comments, I will write “What an interesting alternative viewpoint” five out of six times when I fail to discipline myself to say nothing.
You always say nothing.
Saying nothing is far better than what you do – say nonsense.
Canada avoided the worst of the US crisis because 70% of mortgage debt is actually held by the banks, and lending standards remained high. As far as I know, they did not have Federal laws saying you had to lend to people in poor neighborhoods, and they don’t have Fannie and Freddie backstopping and buying up loans. The banks make the loans to people who can pay them back and hold onto them until maturity. Wow, what a crazy concept.
At my parents within the last two years or so, I was talking with a guy who actually had been a bank regulator in Canada during the bubble years. I couldn’t really get him to give me a satisfactory explanation. (Believe it or not, I’m very open-minded with people especially if it’s at a social gathering. I hate awkwardness.) I think he basically concluded, “What the hell were you Americans thinking?”
Question: Do Austrians believe there’s a housing bubble in Canada?
Yes.
As a Canadian who is closely following this, I second it.
I follow this guy:
http://www.greaterfool.ca
Did you have someplace specific in mind? I ask because the natural resource boom in Alberta/Saskatchewan is causing a severe housing shortage as people move in from B.C., Ontario, etc. Is that a bubble? Seems hard to diagnose.
You’re gut was right, bias on full display.
Because…?
Because you’re not biased towards socialism, silly.
This Canadian liberal politician bank economist says Canadian banks did well was because of Canadian regulations:
http://johnmccallum.liberal.ca/johns-take/why-have-canadian-banks-done-so-well/
Conceptually, I have a problem with assigning the term “deregulated” to a fiat system where banks have a monopoly ability to lend funny money. It’s quite possible that a fiat system with a regulated 30% down payment home loan requirement might have fewer bubbles than “our” system had.
Since we are dealing with an illicit fiat system, this really says nothing about whether “regulation” is good or not.
Bob, right, I have said many times in interviews etc. that the worst of all worlds is one where bankers can do whatever they want, and have the taxpayer/Fed backstopping them. Of course I think the best of all worlds is where bankers can do whatever they want, and nobody is backstopping them. The in-between cases are tricky. But Tom is here pointing out that the standard pro-regulatory case has a slight problem. It’s not fatal, but I would like someone to spell out exactly why the US was fine with Glass-Steagall but then blew up without it, whereas Canada didn’t blow up even though it lacked Glass-Steagall, etc.
We’re having a research presentation on Friday where the guy is going to argue that increased bank concentration made the U.S. bank system susceptible to systemic risk. My question will be: why did the Canadian system not also crash, being as how the Canadian banking system is much more concentrated?
I’ll let you know the answer, but I bet (and research on this topic is desperately needed) it is because of asset concentrations. I’ll wager dollars to doughnuts U.S. banks that got in trouble were all way over-exposed to real estate. Without “The House that Uncle Sam Built” (Horwitz, I think) you’d never have had the mispricing that would lead banks to be so overexposed to a particular asset class.
Here’s an obscure Canadian fund manager on Canada’s undercover bank bailouts:
http://www.sprott.com/Docs/MarketsataGlance/11_09%20Dont%20Bank%20on%20the%20Banks.pdf
I see comments here on the housing market in Canada.
All the metrics show that on average, the Canadian housing market is more bubilicious than the US market ever was. Also, Canadians have hit an all-time high of debt-to-income ratio, which is higher than the US all-time high.
The market was saved here in 2008/2009 by a renovation tax credit, the introduction of zero downpayment 40-year mortgages, emergency low interest rates and a more aggressive mandate for the CMHC (Canadian Mortgage and Housing Corporation, but more accurately the Canadian Moral Hazard Corporation which is the Canadian analog of fannie/freddie)
I am sorry, but I don’t pay much attention to Canadian economic trends. Are you saying that Canada has followed the same US policies (in loose terms), and that they are looking at the same result (just a few years later)?
Yes.