The Economy Up North
| Thu Feb. 12, 2009 11:45 AM EST
THE ECONOMY UP NORTH....The economy in Canada is doing pretty well. Fareed Zakaria explains why:
So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.
Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north.So there you have it. Keep your housing bubble to merely huge but not gargantuan size, and keep the gearing in your banking sector to merely huge but not gargantuan levels, and you'll do OK. Boring, isn't it?