A Canadian Perspective on the Global Financial Crisis

Hon. John McCallum, P.C., M.P.

Member of Parliament

Parliament of Canada

Notes for lecture at the University of Southern California, November 1, 2011

Canada-US Relationship

• “Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.” – Pierre Trudeau, Prime Minister of Canada, Washington Press Club, March 25, 1969

• "The Americans are our best friends whether we like it or not." – Robert Thompson, Leader of Social Credit Party, early 1960s

In a lecture to very enthusiastic Chinese students in 2002, I referred to the United States and Canada as elephant and mouse. First question from Chinese student: “Why doesn’t the mouse jump into the elephant’s nose and suffocate it?” My answer: That would be a highly risky strategy for the mouse. By and large, we think the elephant is a kind and friendly beast.

Canada has done relatively well

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Unemployment rate, Canada and the US 1985-2010 (Diamonds indicate unemployment rate in September, 2011)

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USA

Why has Canada done relatively well?

• Sound banks – Resisted deregulation in the 1990’s and did not

allow bank mergers

• No housing bubble – Canadian mortgage delinquency rate 0.3% versus

10% in the US

• Strong natural resource sector – Plus favourable commodities prices

• Sound government finances (more below)

Canadian government finances went from dismal in the mid-1990’s to pristine by 2005

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General Government Net Financial Liabilities (Net Debt), Group of Seven Countries, 1986-2010 (% of Nominal Gross Domestic Product)

Canada France Germany Italy Japan United Kingdom United States

Canada-US comparison in deficit reduction

Canada in the mid—1990’s USA Today

•Relatively weak economy •Very weak economy

•Majority government •Politically divided government

•Outside pressures •Little or no outside pressure

•Domestic Pressures •???

Recoveries after financial crises are slow

Source: Bank of Canada, 2011

This is mainly because deleveraging by banks, households and governments slows down growth

Source: Bank of Canada, 2011

Focus on jobs in the short run and balanced budgets in the medium run

“If countries have solid measures to anchor savings in the medium and long term, they can do more in the short term to accommodate growth. The amount of available space depends, of course, on country circumstances.”

“The United States must reduce its fiscal deficit over the medium and long term, deal urgently with unemployment, and relieve pressure on overly indebted households.”

– Christine Lagarde (Managing Director, IMF, September 23, 2011)

• This suggests that the American Jobs Act is in the right direction, but it is unlikely to pass.

Current Eurozone Deal

• 50% write-down of Greek debt • Banks raise Tier 1 capital to 9% between now and Q3 of

next year - either on their own or with help of national governments, or, failing that, with help from European Financial Stability Facility (EFSF)

• EFSF to be levered from 300 B Euros to around 1.5 T Euros.

Beijing has received a phone call! • Progress, and initial market reaction was positive, but will it

be enough?

US Banking Crisis 2008 versus Eurozone Debt Crisis 2011

• DOLLARS WAY BIGGER IN US : $15T real estate loans in US, including $4.5T Fannie Mae and Freddie Mac, versus sovereign debt for Greece, Portugal and Ireland less than $1T. Add Spain and Italy, and you’re up to $4.3T. Note that GDPs of US and Eurozone are similar: €9.2T versus $15T

• BUT EUROPE CRISIS IS MULTIDIMENSIONAL, NOT JUST BANKING: – Europe crisis is not just banking, but also sovereign debt and fate of the euro currency

• ONE COUNTRY VERSUS SEVENTEEN COUNTRIES

– Challenge is 90% politics, 10% economics

• BOTTOM LINE (in my view):

• Creation of the euro was a bad idea, but now that it exists, it’s less costly to keep it than to abolish it. Sustainability of euro requires euro member states to become more like US states or Canadian provinces and less like sovereign states, at least in terms of fiscal policy. Whether or not that will happen remains to be seen.