Shovel-Ready in Canada

Pundits are praising the financial health of the United States’ northern neighbor—but should they?

By Maurice Dufour

Canadians have long been trying to shed what they feel is an undeserved stereotype, namely, that our country is boring. Try as we might, we can’t seem to shake the association with dullness. The gap between our self-image and the way others perceive us is still yawning, so to speak.

Recent developments might offer an opportunity for an extreme image makeover, though. That’s because, amidst the recent global economic carnage, this country’s financial system appears to have emerged relatively unscathed. So more and more people these days are actually getting excited when they think about the land of moose, Mounties and maple syrup. Now every country wants to be more like Canada, it seems.

What was it, exactly, that saved our banks? It wasn’t innovation? It wasn’t risk-taking? No—it turns out our “comparative financial virtue comes from NOT having changed,” as one financial observer put it. We didn’t really outsmart the financial wizards on Wall Street. Our dullness, it appears, is a virtue. All the attributes of the Canadian identity that we’ve been trying so hard to cast off—prudence, responsibility, sobriety (dullness, in short)—are actually cause for celebration. Rather than creating a Canadian version of “Extreme Makeover,” then, we should be syndicating “Canadian Idle.”

The plaudits have been coming in fast and thick. Here’s Fareed Zakaria in Newsweek: “Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize.” Canada’s banks, in fact, have been declared the healthiest in the world by the World Economic Forum. Researchers at the Swiss bank UBS “expect Canadian banks to continue to outperform their global peers given superior asset quality, capital, liquidity, and return on equity.” On his recent visit to Canada, former U.S. Fed chair Paul Volcker also heaped praise on the banking system, calling on others to emulate the “Canadian model.” The reasons Canadian banks are in such a strong position, he said, “are consistent with the direction in which I think the financial markets should go.”

The back-patting here is causing dangerous inflationary pressures. A huge ego-bubble has developed in the financial sector, which has been rejoicing in having done better than the United States (a perennial Canadian pick-me-upper). “Canada is in a vastly better position than the United States [because] we have managed our banking and fiscal affairs more prudently,” gushed one financial pundit.

So self-righteous have we become that Obama might even be in for a lecture when he arrives in Canada today. “Listen to us,” he’ll likely be told. “Our government is a model of fiscal probity; our banks, a study in responsible lending. Are you sure you don’t need advice on running your economy?” Boarding his plane back to Washington, Obama will probably pick up a recent article in the Globe and Mail, placed conspicuously on his seat by one of our PM’s handlers (disguised as a flight attendant): The self-congratulatory title of the article: “Obama’s Great, but Canadian Prudence Trumps Political Charisma Every Time.”

True, banks here are still afloat because there was only marginal engagement in what Volcker called “highly risky entrepreneurial activities.” Known in banking circles as “innovative” finance, these were the reckless practices undertaken by the sorcerers of securitization that ended up flooding the American banking system with toxic assets and creating the current credit crunch. Tighter regulatory structures, combined with a more risk-averse business culture, prevented toxin levels in Canada from rising uncontrollably, or so the story goes. As one journalist has noted, “regulatory regimes that once seemed stifling now appear enlightened.”

Flush with capital, banks here are a reaping the benefits of the collapsing banking system south of the border. As foreign competitors shrink, Canadian banks, whose capital ratios are still above the regulatory minimum (about 20-to1), have strengthened their market position. For example, Toronto Dominion Bank, ranked the 15th-largest bank in North America last year, is now the fifth largest. In January this year Canada’s biggest insurer, Manulife, was contemplating a $20 billion acquisition of AIG’s most prized unit in Asia. The deal has since been dropped, but Manulife’s CEO still has visions of global market dominance.

Celebrations over our financial integrity may be premature, however. Cries for help from the real economy may be heard over the clanging of champagne glasses on Bay Street. Economic indicators are nothing short of calamitous. Canada just suffered its first trade deficit in almost 33 years. The drop in the price of oil and other major commodities is pulling the Canadian dollar down, our car industry is on the verge of collapse (as in the United States, bailout money is conditional on “restructuring” in the car industry, shorthand for “firing tons of workers and forcing the others to cut their wages”).

Wages are stagnant, moreover, and Canadians are maxed out on credit: outstanding credit card balances have increased 40% since 2004, a jump of $80 billion. The ratio of household debt to disposable income, according to consulting firm Deloitte & Touche, is now 130%—surpassing for the first time that in the United States. Delinquencies have doubled to 10% in the past few months. According to Forbes, “banks could be on the hook for more than C$800 million (US$656 million) in bad credit card debt in 2009.” Personal bankruptcy filings in Canada jumped 50.6% in December compared to a year ago. The official unemployment rate is fast approaching 8%. In short, the “resilience” of our banks matters little if the real economy is imploding. The financial sector is bound to suffer sooner or later.

It might be sooner. Canadian bank stocks are already down 37% over the past year amidst ongoing concerns about the health of their dividends. While the media are reporting that Canada’s major chartered banks have not yet needed government “help,” they are experiencing serious liquidity problems. And Ottawa has had to intervene in a big way. Perhaps aware of the need to maintain the illusion of fiscal probity, the feds haven’t called it a “bailout,” though. And the banks, perhaps mindful of their image as role models for the rest of the world, are downplaying the credit crunch. “All is well,” they keep saying, even as our finance minister keeps pleading with them to provide more credit. Meanwhile the banks have been slow in passing on central bank interest rates cuts to consumers.

The new federal bailout program is called the “Extraordinary Financing Framework,” which involves exchanging C$200 billion of highly liquid government debt for illiquid mortgage assets held by banks. Duncan Cameron, an economist who once worked at the Department of Finance, calls the ruse a “callous cash grab.” As well, the federal government has given itself new powers to acquire ownership stakes in financial institutions. Furthermore, accounting rules have been changed to allow the banks to delay writedowns on loan-losses, and C$700 million has been pledged to the Export Development Canada and the Business Development Bank of Canada to help free up credit. Our government is responding to the crisis just like every other—with handouts.

The “Canadian model,” in short, doesn’t sound that much different from what’s going on in other countries. Our banks are no more virtuous than anywhere else. Over the years, in fact, they have been clamoring to get governments off their backs like everyone else. If they had their way, our banks would be as “mavericky” as Lehman Brothers. In fact, as recently as January 2008, in a submission to the Competition Policy Review Panel, the Canadian Bankers Association was calling for “a fresh look at the existing structural policies governing the financial services sector.” It was also lamenting the fact that banks were losing ground to competitors from other countries and being denied “the full range of options available to financial institutions in other jurisdictions.” Sounds like they were itching to dabble a lot more in dubious debt instruments.

Now that these deregulatory moves have wrecked havoc worldwide, and financial alchemy has been exposed as a giant Ponzi scheme, our banks are now claiming their prudence saved them. And as opportunities to scoop up mounds of taxpayer money present themselves, our banks are “shovel ready.”

Well, at least our national reputation is still intact. Or is it?

Maurice Dufour teaches political science at Marianopolis College in Montreal, Quebec.