Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

Why Banking Crises Happen In America But Not In Canada

John Kay 5th June 2014

John Kay, Banking Crises

John Kay

Tim Geithner’s memoir, published last month, tells us of his life as a firefighter: constantly on call to extinguish a fresh blaze. His baptism of fire, as it were, was in the Mexican financial crisis of 1994: he gained more firefighting experience when called out to Thailand – followed in short order by South Korea then Russia. There was a period of recuperation until the mother and father of all conflagrations broke out close to his fire station. From his experience of these blazes, he warns us to keep a close eye out for any signs of flames and to apply overwhelming jets of water at every opportunity.

But there are many things wrong with this analogy. The fires in question are not natural phenomena, like hurricanes and earthquakes. They are the product of human agency – even more so than bush fires. And, although Mr Geithner has noticed that wherever he goes the same group of arsonists has been there ahead of him, he has nothing but disdain for “old testament moralists” who think it might be better to let some buildings and their occupants burn.

In addition, the stuff used to douse the fires is not cold water but a stream of liberal credit – precisely what set the blaze alight in the first place. Better, perhaps, to limit access to matches and petrol, and to construct firebreaks. Perhaps the problem is one for the police as well as the fire service. Handcuffs might be as useful as the fire hose.

A different account of the origins of financial crises is to be found in a recent book by Charles Calomiris and Stephen Haber. They begin with an obvious question, which Mr Geithner has not thought to ask. Why are financial crises common in the US, and even more so in its southern neighbour, Mexico, but almost unknown in Canada?

Behaviour of people employed in the financial sector are neither predetermined nor universal, but rather the product of culture, history and the political system (photo: CC jpellgen on Flickr)

‘Behaviour of people employed in the financial sector are neither predetermined nor universal, but rather the product of culture, history and the political system’, says John Kay (photo: CC jpellgen on Flickr)

Mark Carney, governor of the Bank of England, is rightly admired for his handling of the global financial crisis. But perhaps the key fact is not that he is Mr Carney, but that he is Canadian, and the bank of which he was previously governor was the Bank of Canada.

Some may speculate that Canadian stability has something to do with the temperature – and Professor Haber, one of the authors of Fragile by Design, has written an essay asserting a link between climate and political institutions.

The thesis of the new book is that the incidence of financial crises is the outcome of local political conditions. The authors describe bankers’ interactions with supervisory authorities as a “game of bank bargains”, in which the structure and behaviour of a nation’s financial system is the outcome of tacit compromises between competing and co-operating interests, mediated in a political arena.

Britain had no banking crises in the 20th century (there was a blip in 1974) but many in the century before and a spectacular one in 2008. The outcome of the UK’s game of bank bargains was, by the late-19th century, an oligopolistic commercial banking system. It was underwritten by implicit mutual support between big institutions and application by the Bank of England of “Bagehot’s rule”: lend freely to solvent banks on sound collateral at penal rates. That structure was dismantled in the 1970s and 1980s in favour of a more competitive banking sector, and the drive to make London a global financial centre.

The US had a uniquely fragmented and fragile retail banking structure, the product of a long-term alliance between community bankers and agrarian populists, made possible by a system jealous of states’ rights. This was replaced towards the end of the 20th century by a network of financial conglomerates controlled by deal makers and traders, who had a decisive hand in stimulating the subprime mortgage boom; a new, bizarre and disastrous play in the game of bank bargains.

Professors Calomiris and Haber describe Canada’s mortgage market as displaying “enviable dullness”: but they might have applied the phrase to Canada’s financial system and some might extend it to the country itself.

Capital markets, regulatory institutions and the behaviour of people employed in the financial sector are neither predetermined nor universal, but rather the product of culture, history and the political system. That is a perspective developed effectively by Professors Calomiris and Haber. It is one completely absent from Mr Geithner’s account.

This blogpost was first published on Johnkay.com

John Kay

John Kay is Visiting Professor of Economics at the London School of Economics and a regular columnist for the Financial Times.

You are here: Home / Economy / Why Banking Crises Happen In America But Not In Canada

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

Nagorno-Karabakh,European Union,EU,Azerbaijan,Armenia Azerbaijan exploits vacuum on Nagorno-KarabakhGeorge Meneshian
Abuse,work,workplace,violence Abuse at work: who bears the brunt?Agnès Parent-Thirion and Viginta Ivaskaite-Tamosiune
Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Vienna,social housing Vienna social-housing model: celebrated but misusedGabu Heindl
social democracy,nation-state Social democracy versus the nativist rightJan Zielonka

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube