International Monetary Fund chief says Canada should be economic model

TORONTO – The head of the International Monetary Fund says measures taken to protect Canada’s economy should be a model for countries trying to fix their financial systems.

Christine Lagarde said Thursday that Canada has been a leader in creating policies intended to rein in the build-up of household debt.

“Abroad, Canada is identified by its values of co-ordination and consensus building, which have given your country influence beyond its years,” she said.

“Building a safe and stable financial system is in the best interests of the global community, but it also serves the self-interest of nations,” she added.

Lagarde made the comments at a dinner held in Toronto by the Canada International Council — an organization created to promote Canada’s position on the world market.

She pointed to the decision by Finance Minister Jim Flaherty to boost down payments on new mortgages for homebuyers as an example of restraint that others should follow.

“All of these new reforms comprise the tools so far that will help us shape the future financial system,” she said.

“We must shape the system so it cannot again hold us ransom to the consequences of its failings.”

Lagarde’s speech focused on global financial reforms that while “heading in the right direction,” still haven’t delivered the safer financial system they were designed to create.

“Some financial systems are still under distress and crisis-fighting efforts are inadvertently impeding reforms,” Legarde said.

She singled out Basel III requirements as one of the financial reforms that had “generous implementation timetables,” that have been in development since 2010.

Under the proposed Basel III rules, a bank’s required capital levels must meet certain requirements, amongst other standards. The intention of the rules is to set a standard on key measures of a bank’s health and its ability to endure future economic downturns.

“There are many vested interests working against change and pushback is intensifying,” Legarde said.

“It is interesting how some banks say the new regulations will be too burdensome, but then spend hundreds of millions of dollars lobbying to kill them.”

Canadian banks have been proactive in reinforcing their balance sheets to meet the Basel III requirements ahead of schedule, and are widely considered a model for international banks because they weathered the global recession better than others.

“Most countries have committed to adopt some or all of the new regulations, and some have moved further ahead with their own national policies,” Lagarde said.

“The challenge now is to proceed to the end of the reform path all together.”




Browse

International Monetary Fund chief says Canada should be economic model

  1. Carney’s move to tighten mortgage regulations was certainly the right move (although it probably should been done earlier.) One must also remember that the Harper Conservatives loosened mortgage rules in the first place back in 2006 with 40-year no-money-down mortgages.

    I think an even better way to control speculative asset bubbles is to go Keynesian: with taxes. If a variable-rate tax is raised on house sales (at the suggestion of the central banker) people will tend to put off home buying until the market cools down. This prevents buyers from getting hosed on inflated prices and getting stuck with negative equity.

    That would also be a great way to control inflation in general (a variable rate VAT that is raised and lowered in conjunction with interest rates to affect aggregate demand — cooperative inflation targeting.)

    One thing the IMF report must have missed, however, is Harper’s dangerous deregulation of the CMHC (federal mortgage insurance agency.) Originally, intended to help first-time home buyers to purchase affordable housing, it’s mandate has gone off the rails. Banks have been allowed to use it to buy $243B worth of “bulk portfolio” mortgage insurance offloading the risk of loans onto taxpayers. This is a moral hazard which often leads to colossal disaster: heads, banks with with risky loans; tails taxpayers lose.

    The REAL Canadian bank bailout
    “All this looks very much like a simple ploy to strengthen Canadian banks’ balance sheets by offloading risk to the Canadian taxpayers. This is the real Canadian bank bailout.”
    http://www2.macleans.ca/2012/05/24/the-real-canadian-bank-bailout/

    • I think the tax you suggest would be too politically difficult. Maybe variable minimum downpayments for mortgage insurance eligibility depending on market conditions. Vancouver should have much higher minimum downpayments to compensate for the risk CMHC is taking in the event of a collapse in the Vancouver market.

      • Yes a variable rate down payment would achieve the same effect. I think overall when it comes to controlling inflation or inflationary bubbles there should be more cooperation between government and the central bank. That way the central bank has a wide range of tools to control inflation more precisely and less costly, whether through regulations or taxes as well as ensuring fiscal policy is in line with monetary policy.

        Using taxation to fight inflation by controlling aggregate demand is actually less costly than using high-interest rates. The latter creates big government deficits; the former creates room for spending, tax cuts and paying down debt.

        In the Keynesian era there was more policy coordination, but much less precise coordination between action and the state of the economy.

  2. If the economic system was functioning properly there wouldn’t be need to rein in built up household debt. Canada’s economy is probably great for those in the upper quadrant, but look at the First Nations people and other disfranchised people and you won’t be so eager to praise our economic system.

    • @bernie37 they get free $11 Billion a year that their chiefs keep to themselves………….

Your email address will not be published. Required fields are marked *