It's a fun narrative, but the mortgages to those who were not credit-worthy were prompted by the government -- not from a lack of regulation, but from a specific intervention by the state.

And that Canadian banks did not go over the cliff -- yes, there was a different regulatory scheme up there, but there also was a different culture.

Harper pointed it out when he was talking to Larry Kudlow -- Canadian banks were actually under-leveraged, compared to what they were authorized to do. Canadian bankers, in other words, were more conservative than their regulators in Ottawa.

***

Where I have come around, however, is on bank mergers. Given that we now apparently declare certain banks "too large to fail" and therefore needing obscene bailouts, I now support the sorts of interventions that Paul Martin made in the 1990s, preventing certain mergers.

Because merger prevention is a pinprick of a state intervention, whereas zombie banks propped up by government sustenance are a much more terrifying phenomenon.

So count me in now as a fan of the small bank. They don't fail spectacularly and take down our financial system with themselves.

our rural overlords in their heart of hearts want to regulate things in our private lives that mostly don't need regulating. *Chortle*. As opposed to all the stuff in our private life that desperately needs regulating? e.g. Lawn care products, trash, bicycles, helmets, the curvature of bananas, farting, ,,,

Zeal breeds fundamentalism which is annoying as all get go and nothing that breeds tolerance of any sort. Excessive zeal is annoying at all times, be it the person who pesters you daily to donate to Mary Lou's baby gift fund, continuously tells you about how they recently quit something (i.e. smoking, drinking, sloth etc) and feel so much better than the week before or yaps on about their favorite team while wearing their colours and symbols all day, all night.

I swear allegiance to the anti-zeal movement, just don't expect me to be all that active in it, lacking zeal and all.

<i>As opposed to all the stuff in our private life that desperately needs regulating?</i>

Medium hamburgers, fresh sushi... So sayeth Queen's Park...

As I reread this is, the bizarrer it gets. The precipitating cause of the crash was regulation: the FMs being forced to make inherently bad loans. Now, that brought a whole house of cards crashing down but I still think this critical point must be acknowledged.

Now, what regulation would you like ... was Europe, Japan, wherever under regulated? Was Canada regulated just enough? I don't think so. This is simply fighting the last war - principals in AIG, Bear Sterns, etc. lost massive amounts of money in this crash. Who is it that knows more than these people about their industries and have more incentive to stop these crashes? It's hard to believe it's some career hack at government desk.

@Ben: don't get me going ;-)

Go! Go!!!

But it wasn't the forming of bad loans - it was the insane quant-based underlying mortgage-based pseudo-investments that created the illusion that sub-prime mortgages could be backed, the illusion that there was capital. In that sense it was not unlike Madoff's scheme. By regulating the things that are available in the marketplace in such a way that "unthings" like credit default swaps or zero down pay only interest mortgages just aren't possible, it would not happen. France's residential mortgages are very tightly limited for example. It is not just Canada. But Ben is right - regulation can be the self-regulation of corporate policy by non-zealots.

Being anti-regulation in itself is like being anti-anything. A guarantee you will be disproven given nothing exist without limitation and a balancing point - not to mention context.

By the way, from what I hear the very small banks of northern NY are not at risk at all as they, like many Canadian banks which are in fact large, also never went down the path of investing in non-profitable investments.

Yet, laws and regulations barring the foolish fantasies of the fiscal libertarianism offers no down side except to trouble the sleep of the confused. So why not? ;-)

Tangent.

But the other point is that no-one would have bought these securitized mortgages had it not been for the implicit guarantees provided by Freddie Mac and Fannie Mae.

So I think the lesson here is not "do not deregulate", but "do not create half-deregulated zombie things".

Oh, and the bigger one is, "keep the social policy out of the mortgage market, feds!"

***

But given large banks' ability to blackmail governments into large bailouts, I'm going to stick with my new-found aversion to large mergers.

What I mean is that Freddy and Fannie were themselves acting on a fictional guarantee which in the end, like in certain Doctor Who episodes, the underlying principles of reality are a void or horror.

Right.

So yet another lesson here is: if we want to give poor people houses, just give them the damned houses, or a wad of cash for a down payment. It's cheaper in the long run.

Mucking around with kinda-sorta guarantees is disastrous.

My point is somewhat meta, but here it goes anyway: it's not what we know _now_ but what did we know _then_ that could have stopped the crash? All the risk models said things were OK; all the playas were all in to the market: the best knowledge a year ago - the consensus, if you will - was this was all risk managed.

Yes, we would ban this stuff now (that the horse has bolted). But _what else_ would you ban?

@Ben ... bottled water. I swear to god if I hear Maude Barlow on CBC radio again I'm going to take direct action against someone or something.

"... what did we know _then_ that could have stopped the crash..."

With respect, I do not believe it is true nor that you know that all the risk models said things were OK. I think I could go back and find references to bubble economy on this blog in 2004-2006.

And as no one understood the credit default swaps (hence the need of AIG to hold onto them with bonuses now) how can se say that there was a consensus?

Well... maybe we should've listened a bit more to Ron Paul.

(On the other hand, he'd put us back on the gold standard...)

Indeed, I think if we actually look for the "voices crying in the wilderness" we would find the wilderness was a pretty busy place... but not tone that was as profitable in the short term.

By the way, when did conservatism become so in love with short term solutions?

Ha ha ha! I thought Ben wrote Ru Paul.

Okay, back to reality...

I didn't know there was a conservative position on short term solutions!

Everyone doing credit default stuff understood them. Unfortunately, their understanding was wrong.

It's easy to talk about voices in the wilderness: there's always a plethora of people calling for this or that. The question is how do you know which ones to listen too? They laughed at Einstein, they laughed at Newton, they laughed at Bozo the Clown...

they laughed at RuPaul...

"Everyone doing credit default stuff understood them. Unfortunately, their understanding was wrong."

Remember that Star Trek where the computer robot satellite thing blew itself up when it was trying to figure out a nonsensical puzzle? That was the nonsensical puzzle it was thinking of.