That anti-populist political system — known in political science as liberal constitutionalism or liberal democracy — is a key ingredient in Canada’s stable banking track record, Mr. Calomiris contends in his paper, which is a summary of a much longer book he’s written with Stephen Haber due out in September. That’s because this kind of political system makes it difficult for political majorities to gain control of the banking system for their own purposes, the authors contend.
Having only experienced the American system, I think of politics and banking as hopelessly entangled. As I recently put it,
Politicians want to make credit allocation decisions. Whatever its nominal purpose, bank regulation is used to enable politicians to undertake credit allocation.
Calomiris seems to take the same point of view, but he argues that some political systems are less susceptible to interest groups gaining control of bank regulation. I am interested in reading more about the research. Meanwhile, you should at least read the whole WSJ piece.
After reading the WSJ article, the question that immediately jumps out at me is what happened to Britain? The three countries he cites (Canada, Australia, and New Zealand) are all British, and their government takes after the British model. But Britain isn’t stable, yet the colonies are?
My personal theory as to why Canada is more stable is that we export all our “young guns” to the States. If you’re a financial type who is at all ambitious, you’ll go to the States to make your fortune. The people who stay behind are more risk-averse, more tied to home and hearth. And the financial system, mores and customs they built reflects that.
No, politicians don’t want to make credit allocations, they just want tribute, and banking is bountiful with its tribute so long as they can extract high rents when times are good and socialize their losses when they aren’t. Politicians can’t extract that much from government on their own, but banking assists them by recycling their crisis money into a steady flow of contributions.
I believe every government has the financial system it wants. They may not understand the full consequences of what they design, but they are designed intentionally.