As discussed previously in this space, the federal election campaign continues to be all about leadership. The Conservatives bet the farm on Stephen Harper, but in doing so embraced the risk that small mistakes by one man could undermine instead of enhance their chances at the polls. And risk became reality when Mr. Harper accused Stephen Dion of panicking during the English-language debate, then revealed his dispassionate, unsympathetic side to Peter Mansbridge and the rest of Canada when he suggested that falling stock prices represent a good buying opportunity. Not surprisingly, much of Mr. Harper's hard-earned and recently-acquired support took away the opposite message, and panicked.
Not that the table hadn't been set; with bank failures and bailouts south of the border and in Europe, it's easy to believe that similar mayhem will occur here. In the face of such calamity, Mr. Harper's calm demeanour and confidence in our banks appeared more like stubborn ignorance than reasoned leadership.
But this isn't the first time Canadian banks have withstood bloodbaths affecting the US banking sector. Our banks were incredibly stable during the Great Depression, exhibiting not a single failure while while 9,000+ banks failed in the U.S. Indeed, the Great Depression there was fundamentaly a question of credit, while in this country it was largely due to the collapse of international demand for Canadian products. In Financial Markets and Financial Crises (1990, National Bureau of Economic Research), R. Glenn Hubbard tells us that,
In sharp contrast with [...] findings for the Unites States, international factors rather than indicators of financial stress in Canada (commercial failures, deflation, money supply) were important during Canada's Great Depression.
The size of our banks may be part of the reason they have avoided much of the crisis experienced by their American counterparts during and since the Great Depression. Larger banks, while having at their disposal the means by which to minimize risk, still seem to encounter it with somewhat forseeable regularity. In 1991, the Federal Reserve Bank of Minneapolis published Investigating the Banking Consolidation Trend (John H. Boyd and Stanely L. Graham), in which the authors state,
Large banks use systematically more financial leverage than small banks, and (other things constant) financial leverage increases risk of failure. Thus, it is not clear that because large banking firms are better able to diversify, they are less likely to fail.
[...] empirical evidence shows that, contrary to popular belief, in recent years, large banks have gotten into more trouble more often than smaller banks.
Deposit holders with the very largest U.S. banks do enjoy some increased - albeit implicit - security however, as these banks are considered too big to fail, meaning they are so large, government could not stand idly by and watch as their failures set off a cascade of failures across the sector (as in the AIG bailout).
Here in Canada, our banks appear to have avoided the heavy leveraging that led to the current crisis in the U.S. In fact, the U.S. Federal Reserve is apparently now "reaching out to Canadian financial institutions to gauge their willingness to participate in rescue operations". Blame Canada, indeed! While the Bank of Canada has purchased $25 billion in CMHC-insured mortgages from our domestic banks to create much-needed liquidity, it was far from a bailout. The central and retail banks have in essence exchanged two things of similar value; tax payers will probably realize a net gain from the transaction in the long run. Meanwhile, the banks now have more cash, which means they can continue to offer credit to Canadian citizens, businesses, and communities.
It is fortunate that the Conservatives (and the Liberals before them) resisted pressure to relax both ownership limits and moratoria on bank mergers. Mergers and increased international ownership would have undoubtedly resulted in larger, more heavily-leveraged domestics, on the basis of which one could conclude similar financial bloodbaths would have unfolded here as well as in the U.S.
In fact, all this mess has already resulted in calls to restrict bank mergers in Australia, and no doubt we are not far from seeing similar discussion here (I'm surprised the NDP hasn't already picked up on this, as their pro-consumer populism coincides very effectively with a policy of banking regulation). Fortunately in Canada, our leaders seldom demonstrate the kind of ideological single-mindedness that would free up our banks to get themselves into more trouble; I suspect it will be a long time before anyone promotes banking deregulation in Canada again.
Back on the hustings, market volatility seems well matched by voter volatility.
As independent voices - such as the World Economic Forum, which in its recently published Global Competitiveness Index ranked the "soundness of banks" in Canada to be best in the world, and Statistics Canada, which on Friday revealed that Canadian employment increased by 107,000 jobs in September (the country's largest one-month gain in at least 30 years) - have provided confirmation of Canada's relative financial health, the bloom once more appears to be on the Conservative rose. Conservative support seems to be rebounding in Ontario (although the bottom is dropping out in Quebec), which may actually put the party back within reach of a majority (a low probability outcome from my perspective).
In an attempt to get every Conservative vote out to the polls, Mr. Harper has even suggested he will resign as party leader if he fails to win this election. But the Prime Minister should be careful... there is a significant ABC (Anyone But Conservative) movement afoot among the left, and his words might just rally enough strategic centre-left votes to force Mr. Harper from the ring. Despite his often shrewd political instincts, Mr. Harper has badly misjudged the Canadian appetite for steady as she goes already in this campaign, there's no way his party has the time to bounce back from another slip.
On a local note, Cathy McLeod takes up exactly 19% of the real estate within Conservative newspaper ads in Kamloops, the rest of the space is focused on: 1. Stephen Harper - YES; 2. Jack Layton - NO, and; 3. Betty Hinton's federal funding successes. Marc Michael Crawford's ads on the other hand, focus much more explicitly upon the local candidate. If Mr. Crawford wins, he's earned it. If Ms. McLeod wins, she'll be sending Christmas cards to Mr. Harper and Ms. Hinton for many, many years to come.
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