By Scott McCleskey, Thomson Reuters Global Head of Financial Services Regulation
Today, Thomson Reuters, along with the Atlantic Council, the Rotman School of Management, and The Embassy of Canada are hosting a special event, The Financial Crisis: Lessons Learned From Canada and The Way Forward.
Today’s discussion got to the heart of things right from the first panel, in which experts from government and industry from both sides of the border were asked to weigh in on why the Canadian financial sector fared so much better than the system in the US. One point stressed throughout the discussion was that the Canadians went through a severe fiscal crisis of their own in the 1990’s, and much of the conservative environment which helped the Canadian economy weather the financial storm in 2008 was created in response to their own earlier crisis.
Among the speakers to make this point was Michael Horgan, Deputy Minister of Finance for Canada. He attributed Canada’s relative success to three “fundamentals” they got right before the crisis as well as their response once the crisis was underway. On the fundamentals, he credited in particular the publicly stated commitment to a specific inflation target (2% with a 1% band) which allowed businesses and individuals to plan without worrying about runaway inflation; a sound financial system with conservative management practices (for instance, Canadian banks consistently held more and better quality capital than required by Basel standards or Canadian regulations); and a more conservative housing finance system – including fewer subprime mortgages and no mortgage-interest deduction which he asserted encourages homeowners to believe they can afford a higher payment than they truly can. The crucial aspect of the Canadian response, according to Mr. Horgan, was the decision to change Canadian law to permit the Bank of Canada to purchase mortgages and engage in other activities to provide liquidity to the banking system.
Throughout the day, credit for fixing the Canadian economy in the 90s and putting it on solid footing was universally given to former Prime Minister Rt. Honourable Paul Martin, P.C., who served as Finance Minister from 1993 to 2002 and Prime Minister from 2003 to 2006. He was interviewed during the event’s lunch by Madelaine Drohan of The Economist, where he described the process of gaining political support within the government and from the public for painful reforms of the national pension system and the economy as a whole. Prime Minister Martin made the point that his effort was aided by the fact that the economies of Canada’s major trading partners were growing at the time, and so the situation facing the US and Europe now is substantially more difficult. He ended by emphasizing that worldwide economic recovery will require that key financial institutions, specifically the IMF and Financial Stability Board, be given broad authority to make changes where necessary.