January 1st, 2014 - Torgo χ

2014-01-01 (Wednesday)

Dear Log,

John Lanchester's excellent book I.O.U.: Why Everyone Owes Everyone and No One Can Pay very intelligibly explains the details of how US + UK banks imploded in that nameless Global Economic Crisis Of 2008 And Since. There is this paragraph, lonesomely tacked onto the end of one chapter:

«All of this—all the funny smells, the missed warning signals, the misaligned incentives, the distorted attitudes to risk, the arrogance of the masters of the universe, the complicity of regulators, the doziness of legislators—symptomized a culture, and also constituted one. It was the culture of the financial industry. It didn’t have to turn out like this. There are occasional frustrating glimpses of how things could have been different in both Britain and the United States. The common good and the interests of the financial industry are not identical—a fact that for the previous three decades has conveniently been forgotten. The financial culture could have been similar but the outcome different if it had not been for those failures of regulation and legislation; they were critical to allowing the culture to go too far and produce the credit crunch. We know that for sure because of the counterfactual example of a country which had a broadly similar Anglo-Saxon attitude to business yet did not go down the path of doctrinaire liberalization and laissez-faire when it came to legislating the financial industry: Canada. The OECD rates Canada’s banks as the safest in the world—the United States comes fortieth, two places behind Botswana, and the United Kingdom comes forty-fourth. Canada is the only one of the G8 countries not to have bailed out its banks. The reason is that Canada didn’t join the party. Its banks had higher capital requirements than elsewhere, the legacy in part of a scare about bank liquidity in the early 1990s which left Canada nurturing a realistic sense of the systemic risks, just at the point when other economies were yelling “Woo-hoo!” and tearing their regulatory clothes off. Other features of the Canadian banking system included lower levels of securitization and the use of securitization mainly as a way of increasing liquidity rather than as a tool for spreading the risks of CDS—and CDO-type instruments; very low levels of involvement in mortgage-backed securities; a law insisting that if anyone was borrowing more than 80 percent of the value of the home, he or she had to take out insurance on the debt; and no tax relief on mortgage interest. Most of all, it was a reluctance to join in the fiesta of laissez-faire, which no doubt owed a good deal to the Canadian national appetite for distinguishing itself from its hypercapitalist neighbor to the south. This, incidentally, did not come at the cost of falling behind in other areas: since 2004, Canadians’ average incomes have grown at 11 percent a year, compared with 5 percent in the United States. A country doesn’t have to have a frenetically overactive financial sector in order to have a thriving economy.»
— John Lanchester, in I.O.U.: Why Everyone Owes Everyone and No One Can Pay [very much worth the read]

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