CNBC has posted an article answering a very simple question:

Why Canada's Housing Market Didn't Crash?

In the article, Canadian economists Llyod Atkinson says something very interesting:

"Nobody stopped a Canadian bank from lending in the subprime market, they chose not to," says CIBC's Benjamin Tal. "It was not the government, it was not monetary policy; there were no regulations whatsoever regarding how much you can lend in the subprime market. Canadian bankers decided not to do so, because it was too risky."

Nothing stopped Canadian companies from lending in the subprime market.

But they didn't.

Nothing stopped Canadian companies from securitizing loans as much as American banks.

But they didn't.

Nothing stopped Canadian companies from issuing Alt-A, or low-doc, no doc loans.

But they didn't.

Nothing stopped Canadian companies from buying securitized mortgages that were rated "AAA".

But they didn't.

So they didn't. But why did American companies?


Perhaps American companies' risk calcuations were different. Unlike Canadian companies, American companies could sell their Alt-A, sub-prime, no doc loans to an eager Fannie Mae or Freddie Mac to take on some of the risk. As an article in National Review Online shows:

On average, these entities accounted for 54 percent of the (subprime) market across the years, with a high of 70 percent in 2007.

Perhaps also American government regulators are too influenced by special interests. As an article in the Guardian states:

This matters for financial regulation, because there is a level of independence and integrity on the part of the regulators in Canada that does not exist in the United States. The line in Washington is that if you want to talk to someone from Goldman Sachs, call the Treasury Department. (emphasis added)

The close connection between the industry and the regulators matters because regulation will always require judgment calls. It also matters because regulation means limiting bank profits. The regulations are by definition about preventing banks from carrying on lines of business that are profitable.

Going back to the last crisis, our regulators should have cracked down on the junk mortgages that were being issued by the millions to buy homes at bubble-inflated prices. But this would have meant clamping down on banks that were making huge profits issuing the loans. It also would have meant clamping down on the investment banks that were making huge profits packaging them into securities and selling these securities all over the world.

So American companies could sell the junk sub-prime mortgages to U.S. government entities (Fannie and Freddie) and then they could influence regulators to make sure the gravy train continued.

Now, the companies that were deeply involved in sub-prime abuses are helping the government write the new rules in the financial reform bill?