Progress on Housing Finance Reform

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July 13, 2013 by apicomely

This is helpful, but not enough by itself after all, regulators failed to prevent the previous bout of poor lending behavior. An important insight, however, is that requiring substantial private capital to take losses ahead of the government guarantee helps to mitigate the moral hazard. This is because the investors with their funds at stake have a powerful incentive to enforce prudent underwriting. The presence of first-loss private capital thus brings market discipline to bear by aligning private interests with those of the government. This is exactly the point made by the Federal Reserve chairman, Ben S. Bernanke, in an April 2007 speech on financial regulation.

Flaherty’s time as finance minister may be over, but any successor faces PM oversight

He has presided over the Canadian economy during the largest crisis since the Great Depression, helped manage a spending splurge from the stimulus program, and then was forced to slash billions in expenditures in an effort to balance the books. Flaherty has not been shy to intervene in the Canadian economy, loosening mortgage lending rules before being forced to retreat and tighten them multiple times to avert a potential housing market meltdown in Canada. He has repeatedly warned Canadians about the risks of spending too much and saving too little, and broke a key Conservative campaign promise not to tax income trusts. Flaherty has been “a very sound and competent finance minister,” argues Ian Lee, assistant professor at Carleton University’s Sprott School of Business in Ottawa and a former banker. Lee believes Flaherty has been one of the top three finance ministers over the last 50 years, behind Michael Wilson and Paul Martin, but does not have any huge legacy projects.

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