Central banking is in the news again because Alan Greenspan, who retired from the U.S. Federal Reserve with an exalted reputation, is on the hustings to argue that there’s little the Fed could have done to pop a real estate bubble, especially when the proximate causes laid just a bit outside the Fed’s scope.
“The central theme of this paper is that in the years leading up to the current crisis, financial intermediation tried to function on too thin a layer of capital, owing to a misreading of the degree of risk embedded in ever-more complex financial products and markets.”
So it wasn’t low interest rates; it was securitization. Greenspan might find some support from James MacGee, at the Cleveland Fed. In a paper called “Why Didn’t Canada’s Housing Market Go Bust?”, he notes that the Canadian real estate market is hardly different from that of the U.S.
“Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust.”
And what is that other factor? According to MacGee, Canadians are a bit plodding: “Perhaps the simplest story is that Canada was “lucky” to be a late adopter of U.S. innovations rather than an innovator in mortgage finance….
“In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles.”
Now where are the incentives for worthwhile Canadian non-innovations?