The Kroog Versus Canadian-Style Boring Banking

This morning Paul Krugman argues if we had a banking system like our practical and erstwhile northern neighbor Canada, our economy would be in much better shape.

Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.

Limiting risk that banks can take and educating consumers against subprime scams with an agency designed to protect consumers:  two things Republicans refuse to have any part of.  The House bill by Democrats does include both of these items, but Republicans in the Senate vow to block the bill.

My question is actually pretty simple for the Teabaggers out there: why are your Republican buddies defending the banks that cost us trillions of taxpayer dollars and refusing to take any action to stop another bailout from happening again?

Which party is for the American people, again?