A Contagious Crisis Comes to Canada
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.