What Does a “Bird” Look Like?
Before you pose the question, “What does a well-designed financial system look like?,” first ponder the question, “what does a bird look like?” Seriously.
Robins, flamingos, and penguins bare little resemblance to one another.
Yet scientists classify each as birds, and each could be called an environmental “winner”: endowed by evolution with a cluster of traits and survival strategies that make it well-adapted to its particular environment.
So it should be no surprise that there can be different models for successful banking systems.
Consider Paul Krugman’s take on the Canadian model:
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.
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.
–Paul Krugman, “Good and Boring“; The New York Times (2/1/2010)
Krugman goes on to note that Canada’s “boring” financial system has held up just fine even though, with just five, dominant banking groups, “essentially all the Canadian banks are too big too fail.”
Sweden is another country that has accepted a highly concentrated — albeit heavily regulated and “boring” — banking industry.
Unfortunately, we in the U.S. have ended up with the worst of both worlds: dangerously — recklessly — big and inter-connected financial players on the one hand, and light to non-existent oversight on the other.
You might call such a combination a “Turkey” of a design.
Or a Dodo bird . . .