I've been so bold as to edit Prince Charles and the pope, so why not the Cleveland Federal Reserve Bank?

Editing the Fed

Canadian flagI’ve been so bold as to edit Prince Charles and the pope, so why not the Cleveland Federal Reserve Bank?

Consider the Fed’s analysis of Canadian vs. American housing and lending trends.


Why Canada might be “a country that got things right”

The report led off well enough:

Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.

It’s written in easily-understood prose and comes to a succinct conclusion. But if you read the report (and re-read once or twice), you’ll agree that my re-write would have been a better approach, not just by virtue of the writing, but also by virtue of the more comprehensive (and candid) conclusion:

Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. This article explores the differences between the two countries’ monetary policies, financial services structure and regulation, and the kinds of mortgage products offered. While the primary culprit behind the American financial services crisis was the rise in subprime loans,  those products, and indeed the housing bubble itself, were enabled by monetary policy and financial services regulation.

Conclusions drive structure

denialAn introduction like this would have led to an entirely different STRUCTURE of the paper, as well.  As written, the Fed meandered through data on housing prices, loan-to-value stats, delinquency rates, central bank target rates, and benchmark mortgage interest rates before getting around to contextualizing them. Most readers’ eyes were glazed over by then.

I would have taken the inverse approach, noting the differences in subprime booms between the countries (and the American bust) and then comparing and contrasting the factors that DROVE those differences, including monetary policy and regulation.  I would also have quoted sociologists on the differences in risk tolerance between us and our “neighbors to the north” as we so often call them.

The Fed is not apolitical, so I guess I should give a nod to the possibility that it was motivated to obfuscate.  Alas, these are the times in which we live.

About Tamela M. Rich

From Charlotte, NC, Tamela writes books, articles, speeches and presentations for business professionals. From "the road" she writes about the people, places and experiences she discovers and the life lessons she learns from them. Invite her to share some of her lessons from the road at your next event!

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  • @Urbane_Gorilla

    First, I think it’s important to note that the US has devolved into a service driven economy whereas Canada is an energy and commodity provider. When we have sold the last piece of Tupperware and last extended-service contract to each other, Canada will still be producing and selling oil, natural gas and lumber to other countries.

    Secondly, we spend 50% of our budget on our military. (Apparently no-one listened to Dwight D Eisenhower’s cautions on the military industrial complex). It has been noted recently that we spend another 20% of our budget on health care. No other country is as extravagant as we are in this respect.

    Lastly, Canada has until recently required 25% down payment on a home,requires PMI on the balance, is stricter in lending guidelines and did not encourage investment firms to wrap loans, and use that as a multiplier to generate more loans.

    Basically, we were over-leveraged, causing a downturn when financials began to unravel, which led to our recession. Canada, because of the differences in our economies was in a better position to weather this storm.

    It would be nice to think that we would learn from this experience, reduce our military, tighten up on the medical portion of our budget (fat chance!), become more strict in lending, oversee financials, and become a country that produces again.

  • I think quoting sociologists would have been a sensible approach, they may have pointed out the difference between the American lust for quick and easy money due to the constant bombardment of same by the media here, and the more stoic Canadian zeitgeist. Then there is the cowboy mentality of the Americans both in the general population and in the regulating bodies, and supervisory authorities, to allow unregulated activity in the housing, mortgage, and derivative securities industries. The same regulation on mortgage insurance that aided the Canadians would have been impossible to pass here, it would have been seen as a government usurping the freedom of the citizenry. Sadly this particular freedom was to commit egregious folly.

  • @jockr

    I think the primary reason for the differing experience is cultural. Canadian culture, generally, is far more conservative than in the US, not in terms of political spectrum, but certainly with respect to risk aversion.

    At the time that I went shopping for my first home there was a 25% downpayment requirement, which could be reduced if you applied for mortgage insurance via the CMHC (Canada Mortgage and Housing Corporation). The maximum amortization historically was 25 years, although when I first became aware of the subprime situation in the US in 2007, I also realized that some Canadian mortages now had amortization periods in excess of 25 years, which, in true Canadian fashion, I found to be astounding.

    I exited the Calgary housing market in the fall of 2007 and the market was about 5% off the peak by that time which had probably been reached in May/June 2007.

    Also I understand that in the US mortgage interest is tax deductable, which is not the case in Canada.

    With respect to the banking system Canada has always had a small number of large banks, in contrast to the plethora of small banks in the US. I had to go looking for bank failures and there has only been one major collapse in Canadian history : the ‘Home Bank’ in the 1920s.

    Until recent times I also understand that Canadian banks were less heavily regulated than their American counterparts. Neither this, nor the scale, in relative terms, would lead one to expect markedly different results coming off last year’s financial crisis.

    With the banks, as with the populace, risk aversion is a far more predominant factor than it is south of the border.

  • Tamela,

    The prose you used in the conclusion was succinct, simple, and elegant. I mean, dear God! Imagine a world where we actually understood what a central banker was saying. Just like Bill Murray said in Ghostbusters: “Dogs and cats, living together. Mass hysteria!”

    But that was the point of this puff piece by the Cleveland Fed. I am very biased against the Fed these days and any prose that would dare to suggest poor/lax monetary policy may have been a contributing factor (if not *the* factor) to our current situation would have been left on the editing room floor, no matter how readable it is.

    In general, it seems like the Fed or any central bank finds itself in very strange places quite frequently. People want to know what they are thinking, yet they are so scared to make/take a stand it generally leaves them communicating very awkward messages.

  • David Buffalo

    As with the housing crisis, the whole climate change “pseudo-science”, and so many other crises facing the U.S. and the world, I would first want to ask, “What is the source of your conclusions and data, and how did you process it?” I trade from statistical bases, so I go through that process daily. All we seem to get from our so-called leaders is bluster about their conclusions, but we never see the basis of them. The American people are simply asleep at the switch, partly from apathy, and partly from years of education which does not include any attention to critical thinking.

    To say Canada “got it right on housing” is probably true because most of the loans, as stated in that article, were 80% LTV loans. It’s not exactly rocket science that credible and payable loans get paid off. There is no special Canadian intellect or superiority of banking system to it. If one can afford to pay a loan without going into hock above one’s eyeballs, then the banking system, borrower, and lender all remain solvent. That could happen in Zimbabwe or Antarctica if they had credible systems of banking and credit. (Penguins do look like bankers; hopefully they could act like them.)

    Creative financing was left out of the equation in Canada. Creative financing went ballistic here in the US. We also had incredibly bad legislation like “The Community Reinvestment Act” (a piece of legislation originally developed by Pres. Jimmy Carter). We had the demolition of Glass-Stegal by Phil Gramm (a Republican) and that demolition signed into law by President Clinton (a Democrat). When you combine stupid legislation with unbridled financing and uncontrolled leverage as we have had through blindly run GREs like Fannie Mae and Freddie Mac and then resold the paper as mortgage-backed securities elsewhere, you get big trouble. Add derivatives to that, and you get Armageddon.

    There is greed on everyone’s hands in the USA. The greed of politicians who want to buy votes with easy lending (Community Reinvestment Act) was initially evident. Then the greed of the securities and mortgage lending industry by obscuring the lines between venture capital and traditional lending practices came with the ending of the Glass-Stegal Act). This ultimately led to the subsequent perversion of lending rules making it tempting for all individuals to lie about their incomes (or simply not report it) to secure ultralow interest loans for house loans that no one could credibly pay back with NO money down as collateral. Greed at the regulatory level, greed at the political level, greed at the banking/lending/investing level, and greed at the individual homeowner level went unchecked and unchallenged, until the entire house of cards collapsed.

    The entire enterprise was a fool’s errand from beginning to end, and each self-interested party, when destroyed, simply pointed fingers at each other.

    The problem that created our housing crisis was not a surplus of debt, but a complete deficit of ETHICS.
    John Adams, our second President said “Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other.” Even if one chooses to derail the religious aspects of that statement, what he said was quite clear. There has to be a sense of ethical action for a free people to govern. That includes fiscal governance at the Federal level, the banking and finance level, and at the level of the individual citizen. The housing crisis was the direct result of an abandonment of the principals by all Americans. I think the citizens are awakening from the hangover of greed. The citizenry need to strike down the criminality that continues to this day at all other levels of government, and to a large extent, in banking. The bailouts, in my view, are already being proven to be shams, and any pretense of deficit spending to create jobs in utter nonsense as well.

    Canada simply did not follow a dark road that we did. Trying to compare an energy rich economy of 20 million or so people to one as diverse and technology-and-service-oriented with 310 million is a bit absurd.

    If at the end of the financial transaction there is still a positive number, all is well. If it is not, all is Hell. America is burning in the debt furnace and has only itself to blame. It’s that simple.

  • derek

    I agree that your paragraph is far more comprehensive in presenting the argument. There are so many dynamics at play, though, that I’m reminded of the Pogo line…”We have met the enemy, and he is us”. A junkie can’t get his fix w/o a dealer, and the dealer can’t make a living w/o the junkie. No way a Fed report is going to lay it out in those terms, so they stick to wonkish presentation. Thanks for considering my input.

  • What an intelligent, thoughtful, and sometimes funny set of comments. I culled best of the best here:

    *When we have sold the last piece of Tupperware and last extended-service contract to each other, Canada will still be producing and selling oil, natural gas and lumber to other countries.

    *The same regulation on mortgage insurance that aided the Canadians would have been impossible to pass here, it would have been seen as a government usurping the freedom of the citizenry. Sadly this particular freedom was to commit egregious folly.

    *With respect to the banking system Canada has always had a small number of large banks, in contrast to the plethora of small banks in the US. I had to go looking for bank failures and there has only been one major collapse in Canadian history : the ‘Home Bank’ in the 1920s.

    *…any prose that would dare to suggest poor/lax monetary policy may have been a contributing factor (if not *the* factor) to our current situation would have been left on the editing room floor, no matter how readable it is.

    *The problem that created our housing crisis was not a surplus of debt, but a complete deficit of ETHICS.

    *Greed at the regulatory level, greed at the political level, greed at the banking/lending/investing level, and greed at the individual homeowner level went unchecked and unchallenged, until the entire house of cards collapsed.

    *There has to be a sense of ethical action for a free people to govern. That includes fiscal governance at the Federal level, the banking and finance level, and at the level of the individual citizen. The housing crisis was the direct result of an abandonment of the principals by all Americans. I think the citizens are awakening from the hangover of greed. The citizenry need to strike down the criminality that continues to this day at all other levels of government, and to a large extent, in banking. The bailouts, in my view, are already being proven to be shams, and any pretense of deficit spending to create jobs in utter nonsense as well.

    *A junkie can’t get his fix w/o a dealer, and the dealer can’t make a living w/o the junkie. No way a Fed report is going to lay it out in those terms, so they stick to wonkish presentation.

  • derek,

    The junkie imagery is quite apt. Central bankers as Medellin cartel kingpins, securitization/asymmetric accounting/overliquified markets as the processing factory with mortgages of all stripes as the raw product. The mortgages come in, the raw product gets cut, re-cut, and re-cut again via the leverage and off-balance sheet treatment, all to push on to the junkies seeking yield. Excellent, I now have fodder for another blog post.

    But let’s just hope central bankers won’t start dressing like Tony Montana from ‘Scarface’ and yelling “Say ‘ello to my little friend!” That would just be stupid.