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Canada, Australia, and the Financial Crisis

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MJM58
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So, I was debating someone, and he said that Canada and Australia were relatively OK with the financial crisis, compared to the US. He said that the reasons for this are that there were tighter banking laws and enforcement, which kept banks from running up ridiculous liabilities: asset rations that left other countries' banks exposed to the bubble.

What would be an Objectivist response to this? I, admittedly, am rather stupid when it comes to some aspects of economics and am baffled as to how to answer this.

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I am no expert in Australian banking laws , however I do know that tighter banking regulations invariably make the effects of a financial crisis *much * worse. Banks do not tend to idiotically round up insane liabilities just because they are free to do , or at least not the majority of reasonably sane banks. It is not in their interest to do so and those that do try this usually go under well before they can cause trouble on this scale.

Also, I am not so sure Australia actually has banking laws and regs as tight as this person might think, I would think not. I dont really know about Canada though.

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It's not so much that the US had "looser" regs but rather that many banks were pushed into, or even forced. to make bad loans. So of course when it hit the fan, "free enterprise" and the banks took the blame, rather than the US congress which passed the laws that forced the bad loans in the first place.

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So, I was debating someone, and he said that Canada and Australia were relatively OK with the financial crisis, compared to the US.

Let's go a step further away from the the US just for the sake of making a point. I hear that Cuba is relatively ok with the financial crisis. That the life of Cubans has not notably changed for the worse because of the international financial crisis.

The obvious point is that the more conservative the attitude of "an" economy (to the extreme of socialism, which is the most conservative economic stance, that is utter stagnation), the less affected will it be by outside factors, be them good or bad. If they always had it bad, why would they notice when everybody else is as well.

Canada is not socialist, and even less is Australia, but still those economies can't be compared with the biggest risk taker on human history, the American economy.

When someone points out how America suffered disproportionately out of this crisis (besides other historical factors, like the possibility of apex point) you may as well point out how, by the same mechanisms, America has benefited disproportionately out of times of growth.

This is I believe just plain common sense, not an Objectivist answer and I'm not an economist.

Edited by volco
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As a Canadian I believe that it wasn't our tighter banking regulations (which I believe would be be SOP for a bank in a free market anyway) but rather the disastrous directives issued to your banking sector by the Government that viewed owning a home as a right worth achieving regardless of the buyers ability to pay for it.

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So, I was debating someone, and he said that Canada and Australia were relatively OK with the financial crisis, compared to the US. He said that the reasons for this are that there were tighter banking laws and enforcement, which kept banks from running up ridiculous liabilities: asset rations that left other countries' banks exposed to the bubble.

What would be an Objectivist response to this? I, admittedly, am rather stupid when it comes to some aspects of economics and am baffled as to how to answer this.

One of the major issues that led to the financial crisis was the fact that banks had very limited liability and responsibility, but increased 'freedom' that came from deregulation. In this case, deregulation basically meant: more freedom to play with other people's money and not face the consequences if that play went bad. Obviously, this is not the vision of the free market that Objectivism advocates. In a truly free market, deregulation is accompanied by a system where companies reap both the benefits and the hazards of excessive risk-taking.

If I had to choose between a system where banks were not held responsible for most of the losses resulting from the risks they took, but they weren't allowed to take very many risks in the first place (because of regulation), and a system where banks were not held responsible for the losses of taking risks, and were relatively unrestricted in the actions they could take, I'd choose the regulation. Of course, neither of these is a truly free market, so they have nothing to say about Objectivism's ideal political system.

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It's not so much that the US had "looser" regs but rather that many banks were pushed into, or even forced. to make bad loans. So of course when it hit the fan, "free enterprise" and the banks took the blame, rather than the US congress which passed the laws that forced the bad loans in the first place.

I hate this argument. To say that banks, with a huge lobby and the amount of funds available to them to ensure this lobby is successful, were wrongly coerced into lending is problematic. A is not A in this argument. You cannot tell me that those who could not afford homes were hiring lobbyists to get them loans that they did not deserve. The financial businesses were in favor of these regulations. Writing mortgages, not necessarily holding the mortgage afterwards, but originating mortgages was highly profitable. Then companies originating these mortgages could dump these mortgages off on good old Uncle Freddie and Aunt Fannie. Financial institutions did win on these looser regulations. Its not surprising that the initial move to amend the Fannie and Freddie charters came under a republican president, Bush.

I worked in the mortgage industry in 2008 when the bottom fell out. The company I worked for did not hold mortgages, we just wrote them and sold them off to Fannie, Freddie, or other banks. The company was very successful, and before the collapse was growing at a rapid pace. People won big on this legislation, don't accept the story you heard on CNN.

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Which banks were in favor of these legislations?

I did not say that they were publicly in favor of these legislations. I simply saying that they have a huge lobby, the initial legislation was enacted under a republican president, and there were huge profits made by portions the financial industry. These facts do not add up.

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One of the major issues that led to the financial crisis was the fact that banks had very limited liability and responsibility, but increased 'freedom' that came from deregulation. In this case, deregulation basically meant: more freedom to play with other people's money and not face the consequences if that play went bad. Obviously, this is not the vision of the free market that Objectivism advocates. In a truly free market, deregulation is accompanied by a system where companies reap both the benefits and the hazards of excessive risk-taking.

It causes a situation of "moral hazard", which specifically means that there is no incentive for the banks to follow the logic and mechanism of the market since someone else will ultimatly clear up the mess. Here in Sweden we had a massive bank collapse in the 90's, however because of restraint from the goverment to pay out too much money the banks learned their lesson. The swedish banks did exceptionally well during the crisis and I think we have a yearly growth of like 6% of GDP at the moment.

And no, though you'd think so, we're not the last surviving sovjet republic and I'd think people would be surprised at the limited ammount of regulation of the banking sector.

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