Canada's Harper Says Financial Crisis Caused by U.S. Policies

By Theophilos Argitis

Sept. 29 (Bloomberg) -- Canadian Prime Minister Stephen Harper, vying for re-election on Oct. 14, signaled his government can do little to help resolve the financial crisis that he and his Group of Seven colleagues say was caused by U.S. policies.

Poor oversight, cheap credit and a tax structure that may encourage housing bubbles are among the reasons for the turmoil roiling U.S. markets, Harper said in an interview. Canada has stronger regulation than the U.S. and its financial institutions are ``strongly capitalized,'' Harper said.

``A lot of things have gone wrong here and, by the way, there were a lot of warning signs. This should not be a huge surprise,'' Harper, 49, said aboard his campaign plane. ``I certainly had expressed my concerns about some of these things to my American counterparts in the time leading up to this.''

Harper joined a growing chorus of criticism within the Group of Seven industrialized nations over the way the financial system has been managed in the world's biggest economy, highlighting the U.S.'s isolation as it seeks to stop the rout. Canada is the biggest U.S. trading partner and one of its closest G-7 allies.

French President Nicolas Sarkozy, speaking at the United Nations on Sept. 23, urged a November summit of the world's major economies to deal with the ``mad system'' that he says produced the meltdown. German Finance Minister Peer Steinbrueck used a speech last week to say the ``Anglo-Saxon'' model of banking has ``an exaggerated fixation on returns.''

`New rules'

Sarkozy told reporters his proposed meeting should establish ``principles and new rules'' to regulate financial markets and punish those who ``jeopardize people's savings.'' Leaders should focus on excessive executive salaries that reward success without penalizing failure, he said.

U.S. allies have refused to back Treasury Secretary Henry Paulson's $700 billion rescue plan. Earlier, Paulson had said he was confident that several nations would take steps comparable to his measure, under which the government would buy up mortgage-related securities to stem the financial crisis.

Asked whether there was anything more that Canada might be able to do to help restore stability in global markets, Harper said: ``Not that comes to mind.''

Playing Catch-Up

While there may be ``legislative steps'' in the future to bolster regulation, Harper said Canada has better rules than the U.S. and its financial system is dominated by commercial banks with ``clear asset bases,'' not institutions involved in the ``merchant banking, money manager'' area that are more vulnerable.

``Far more preferable to properly regulate and manage the system than to have to step in later,'' Harper said. Stronger oversight in Canada means ``right now, we're avoiding having to go in and be the underwriter of private financial industries.''

Harper said one factor behind the U.S. crisis is ``over- deregulation'' and regulators that often are grasping to play ``catch-up'' with increasingly complex financial instruments. There is also an ``inherent bias'' in the U.S. tax code that gives homeowners incentives to take on too much debt, he said.

U.S. taxpayers are allowed to deduct the interest on their home mortgages, something not permitted in Canada.

``Some of it may be regulation, some of it may be, and this would be something not popular to say if I were an American politician, mortgage interest deductibility,'' Harper said. ``There is an inherent bias in the tax code for people over-leveraging.''

Mismanagement

He also cited ``mismanagement'' of housing lenders Freddie Mac and Fannie Mae, which were taken over earlier this month, and indications the Federal Reserve may have kept borrowing costs too low. ``Interest rates had gone down too far'' in the U.S., Harper said.

The Bank of Canada's reluctance to tame the country's currency by cutting interest rates may have helped Canada avoid being in a similar position, Harper said. The gap between Canadian and U.S. benchmark interest rates widened to the most since June 2004 earlier this year, keeping Canada's currency close to parity with the U.S. dollar which hurt exports.

``The Bank of Canada deserves to be complimented,'' Harper said. ``Some of us were skeptical at the time about, you know, that we were allowing the differential to widen and seeing the dollar going up.''

The U.S. now has few options but to bail out investors, Harper said, adding he's optimistic Paulson's plan will help.

``The first objective right now is stability of the financial system, Harper said.

Polls show Harper's Conservatives are poised for their first back-to-back victories in two decades, largely because of the party's perceived superiority on economic issues. An Ipsos Reid poll on Sept. 22 showed 26 percent of Canadians say the economy is their top campaign issue, compared with 11 percent for the environment.

Harper, Canada's first elected Conservative prime minister since Brian Mulroney served from 1984 to 1993, ended 13 years of Liberal rule when he won power in 2006. He had to govern with 27 seats short of a majority in the 308-member Parliament, meaning he needed rival parties' help to pass legislation.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net.