Financial heaven and hell
There is nothing like a home-grown financial crisis to undermine a superpower’s sense of superiority. The United States is finding it has something to learn from some of the world’s lowest profile countries.
Among those that are now being held up as role models are Denmark, Canada and Sweden.
This brings to mind the old joke about the European heaven and hell. In a financial heaven you would have Danish mortgages, Canadian regulators and bank rescues would be orchestrated by the Swedes. In a financial hell the mortgages would be Hungarian, the bank regulators would be from Iceland and the Americans would manage bank rescues.
Imitation is the sincerest form of flattery, yet there has been precious little of this. This is probably a result of the continued political influence of the financial oligopoly.
The common thread linking Danish mortgages, Canadian bank regulation and Swedish bank rescues is that they are all less favourable to the financial services sector.
The Danish mortgage system has huge appeal to everybody but entrenched interests. Emulating it in the United states would involve finally putting Fannie Mae and Freddie Mac out of their misery. It would also force mortgage originators to retain the full credit risk of loans, allowing them to palm off only interest rate risk.
For the public, the system offers considerable benefits since the way mortgages are securitized would greatly reduce the threat of negative equity. Similarly the Swedish bank rescue in the 1990s enabled the taxpayer to recoup almost all of its bailout investment.
Obviously it was less good news for shareholders of the hapless Nordbanken and Gota, who were wiped out.
It is not hard to understand why the Swedish model might not have appealed to the financial services sector, even though the International Monetary Fund ranked it as one of history’s most successful bank rescues.
Although it is not universally accepted, Canada’s more old-fashioned banking regulation almost certainly helped prevent a U.S.-style collapse. Canadian bankers and regulators even achieved a touch of celebrity after the World Economic Forum ranked their system as the most stable in the world in 2008.
Here at least, U.S. policy makers seem inclined to follow the example set by their less glamorous northern neighbour. But as banking profits recover, they are likely to encounter some push-back.
Obviously no foreign system can be incorporated wholesale into the United States. But if policy makers in Washington are to be free to learn from the world’s best practices in the future, they need to break the political power of the banks.