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A Contagious Crisis Comes to Canada

October 19, 2008

Every now and then I like to read The Economist, usually on an airplane. Early last week, on my way from my usual haunts in Beijing to a conference in Cleveland, Ohio, I decided to find out what the venerable “newspaper” had to say about the global financial crisis.

It’s possible to find people willing to attribute the turmoil to almost anything: the lack of a gold standard, affirmative action, the judgement of Yahweh, the vengeance of Allah, militant atheism, foolish governments, greedy bankers. The Economist, however, was mostly interested in deflecting blame from what it described in a special report as “the highly leveraged, lightly regulated, market-based system of allocating capital dominated by Wall Street”. The special report did make a couple of good arguments: that the bad loans at the heart of the crisis were encouraged by “a political edict” to finance more mortgages in order to provide access to affordable housing, and that America’s interest rates were set too low. Perhaps the lesson is that any economy that wallows in excessive debt is simply asking for trouble, irrespective of whether that debt is the result of bad government policies, financiers run amok, or sheer greed and short-sightedness.

At the moment America is probably suffering from a combination of these factors, as are European nations (with Iceland as the prime example) that joined in the credit-fuelled binging. The Canadian financial sector was apparently somewhat more prudent, which really leaves us with only two major worries. Firstly, our economy is almost symbiotically intertwined with America’s, so this largely foreign-made crisis is taking its toll on our own finances. Secondly, yowls of pain from south of the border can be irrationally contagious, damaging confidence and leading to self-fulfilling pessimism. As another article from last week’s Economist put it:

…Canadians are exposed to the American media and their now daily drumbeat of dire economic news in a way few other people are. They tend to think that what happens south of the border will eventually come north, and often it does.

Surely the answer to both problems is a modest degree of amiable disengagement from the United States. Economically, we need to divide our eggs among more baskets, so that we can rely on overseas trading partners when America hits a rough patch. Psychologically, we need to learn to ignore that daily drumbeat and cultivate the habit of thinking for ourselves.


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4 Comments leave one →
  1. corsullivan permalink*
    November 3, 2008 1:32 am

    The Economist didn’t say much about the Savings and Loans crisis specifically, but it did make a curious argument about the roots of the crisis: that the problem was actually too much regulation, insofar as “[m]any of the new-fangled instruments [that are blamed for the current mess] became popular because they got around financial regulations…” This strikes me as analogous to arguing against restrictions on gun ownership on the grounds that they only encourage people to stab each other with knives.

    Incidentally, I went back to the Economist website to refresh my memory of the article, and discovered that they’re predicting a big Obama victory on Tuesday. It will be interesting to see if they’re right.

  2. reneethewriter permalink
    October 30, 2008 9:44 pm

    Hi Cor, (as you can see, tonight i’m trying to catch up on my ‘outstanding comments’ – and this one will still be too short to do justice to your piece.

    One thing: I’m curious if the Economist (still haven’t had time to click on the article – sorry – examined the Savings and Loans crisis. I remember years back L.Lapham when he still was the PoohBah at Harper’s doing a long piece on this and now I’ve seen several writers like Krugman reach back to trace the roots of “highly leveraged, lightly regulated”…R

  3. corsullivan permalink*
    October 21, 2008 8:46 pm

    I’m not quite sure what to think about this latest torture case. I haven’t seen any detailed reports, but so far I get the impression that Canadians contributed indirectly with a strong emphasis on the “indirectly”. Nobody seems to be suggesting that we asked Syria to torture the men – we simply pointed them out as potentially dangerous people who ought to be asked some questions, without worrying too much about what methods might be used to get them to answer. However, even this strikes me as callous and unnecessary, as you might have guessed from my previous expressions of disdain for the whole “War on Terror”. So yes, this is another area where I would favour some amiable disengagement.

    I’ll try to remember to read Krugman’s columns at least occasionally. He must be pretty bright if he won a Nobel Prize. On the other hand, the pieces of his that I’ve seen were primarily about domestic matters in the United States, which I don’t usually have the patience to explore in too much detail – and when I do, I often find outside perspectives more illuminating than American ones.

    Anyway, I’ll look forward to your further thoughts, as always.

  4. reneethewriter permalink
    October 21, 2008 10:39 am

    I’ve been mulling over your article – will write more…this morning this item from my newwire service:
    “A federal inquiry has concluded the actions of Canadian officials contributed indirectly to the torture of Arab-Canadian men in Syria”
    and i thought about your premise:”Surely the answer to both problems is a modest degree of amiable disengagement from the United States.”
    p.s. would you consider adding Paul KrugmanNYT(just won Nobel for economics) to your weekly reading?

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