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Stephen Harper launched a U.S. media blitz last March, appearing on CNN to offer his no-fuss, three-step recession remedy. First, government spending was necessary to stimulate the economy. Next, the financial sector needed a ‘major fix.’ Finally, the housing market required some tough new rules. Of course, this was his plan to fix America. In Canada, he informed the viewing public, well, we were already a couple of steps ahead. ‘We’re just fortunate in Canada,’ he said, offering a cat-who-swallowed-the-canary smile. ‘We don’t have a bank failure, and on the housing side … we have a cyclical downturn but nothing that requires major government intervention.’
Similar boasts came in other interviews. Harper told CNBC that his country had ‘the only banks in the western world’ that did not require bailouts. Canada would end the recession with the ‘only truly free-market financial system’ on the planet, he told Fox News’ again with that wee grin. The philosopher king’s welcome Harper received in the U.S. was far warmer than his treatment at home, where the PM had, three months earlier, barely averted a coup by the opposition parties. In Canada, Harper helmed a tepidly popular minority government accused of acting too late to avert a recession. To the rest of the world, he was leader of a country praised for its banking regulations, mortgages rules and budgetary surpluses. Ignore, for a moment, that Canada’s praiseworthy prudence was largely a legacy of past government. This was Canada’s year to toot its horn, and Harper was perfectly happy to serve as bugle-boy-in-chief.
The ensuing months have given heft to the prime minister’s hyperbole. The recession in Canada lasted just eight months, far shorter than the United States’ projected two-year slog or even Canada’s own recessions in the early ’80s and ’90s. Furthermore, at its nadir, Canada’s GDP fell 5.4% — pretty good compared with the 5.7% drop in the U.S., and awesome stacked against Germany’s 14.4% slide or Japan’s 15.2% tumble. Perhaps most important, more Canadians kept their jobs than their American counterparts. The workforce shrank 2.5% in Canada, while America’s workforce will likely have been reduced by 5% or more.
Canada’s economic stability had been noticed even before Harper began his publicity tour. The World Economic Forum in late 2008 rated the country’s banking system as the soundest on the planet. In March, the Financial Times ranked Bank of Canada governor Mark Carney as one of the 50 people who will shape the future of capitalism. And no less than President Barack Obama said Canada had proven itself to be ‘a pretty good manager of the financial system and the economy in ways that we haven’t always been here in the United States.’
It is Canada’s well-managed banking sector that is most often cited for its resilience in the face of global tumult. Once ridiculed as overcautious and overly regulated, Canada’s banking sector is now being used as a model in the United States, Ireland and beyond. Britain is spending $28.6 billion to bail out Lloyds Banking Group, and the U.S. has lost more than 122 banks between January and the middle of November alone. But not a single Canadian bank closed during the recession, none needed bailouts and Canadian government’s lone intervention in the industry — an offer to purchase $125 billion in insured mortgages — went half unused.
No wonder Carney engaged in his own boosterism during a speech to the University of Alberta in April. ‘Our system is better,’ he bragged. ‘Regulation has been more consistent. Our banks have been more conservative. Credit conditions in Canada remain superior to those in virtually every other industrialized country.’
Indeed, a combination of Canada’s oft-lauded regulatory system and a conservative culture in the banks themselves appeared to save the day. Banks in Canada deal with a single regulator instead of the hodgepodge of overseers in the United States. Regulations require $7 in capital for every $100 they have in outstanding risks, or a 7% capital ratio, a far more comfortable cushion than the roughly 6% needed in the United States. Even better, most Canadian banks’ capitalization ratios are now comfortably double-digit.
Canadian banks were cautious in their approach to mortgages as well. Sub-prime mortgages only ever made up roughly 7% of the market, compared with closer to 20% south of the border. Furthermore, banks rarely sold their mortgages to other institutions and never relied heavily on third-party mortgage brokers, thus reducing the chance they’d end up with income-less, asset-less debtors and keeping default rates low. ‘The bottom line is that a sounder financial system in Canada allowed the credit taps to remain open, unlike in the U.S. or Britain, where banks just froze or tightened their lending standards quite severely,’ says Sal Guatieri, a senior economist with BMO Financial Group.
A bit of caution proved a boon to Canada in other areas as well. During the boom years between 2002 and 2007, the residential construction levels did not exceed demographic requirements, according to Pedro Antunes, an economist with the Conference Board of Canada. ‘We didn’t see an overbuild in any way,’ he says.
Even when you consider personal finances, Canadians proved far more moderate than their American counterparts. Total household debt in Canada sits at roughly 102% of income. In the United States, the ratio is 114%. While many Americans were forced to start paying down their debts, Canadians were able to take advantage of low borrowing rates, buoying consumer spending.
If high commodity prices and Canadians’ open wallets pulled the country through the start of the recession, the government’s stimulus package will be the ‘bridge’ that gets the country back on the road to growth, says Antunes. However, it was a bridge the Conservative government initially seemed reluctant to build, despite what Harper told U.S. cable channels.
During the 2008 federal election, the Conservative leader denied the recession would push Canada into deficit. An economic update released that December — at the height of the U.S. economic crisis — did not contain any stimulus measures. Only this January, following the threat from the opposition parties to form a coalition and wrest control of Parliament from the Conservatives, did the government unveil a $35-billion stimulus package including $18 billion in infrastructure spending.
‘Since Sir John A. Macdonald laid a railway across a continent, infrastructure has been both an immediate response to an urgent need and a hopeful act of nation building,’ Finance Minister Jim Flaherty said, casting deficit spending as a proud part of Canada’s heritage.
There have been no new railways, but the government has funded everything from refurbishment of Montreal’s largest bridges to replacing doorknobs in RCMP offices in Charlottetown. The cost of the package, which has ballooned to $61 billion, put the country into its first deficit in 12 years. It was an odd trade-off. To pull Canada through the recession, the government sacrificed the fiscal prudence that many experts say shielded the country in the first place.
Regardless of the government’s budgetary excesses, the past year has cast Canada as a symbol of fiscal prudence and sound management to the rest of the world. Banks, once reluctant to advertise their nationality to international investors, now announce their Canadian credentials in advertising campaigns. The Royal Bank of Canada — which once just called itself RBC abroad — now proudly uses its full name. To the more poetically minded, Canada’s new-found reputation — on which it can now capitalize for years to come — speaks to our national character. Canada is moderate, even-handed and cautious. Sixteen months ago, it made us seem dull. Now, it makes us seem dull and smart.
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