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Posted at 12:07 PM ET, 12/ 8/2010

The Great White (hopeful) North

By Howard Schneider

Canada, after a painful financial restructuring in the 1990s, has positioned itself as America's frugal neighbor, wtih conservative banking rules and government policies that helped it skirt the worst of the downturn.

The country opened the government taps during the recession but has been pulling back during the recovery. It is expected to trim its federal deficit to its target three percent of economic output by next year and move steadily to a balanced budget.

But the very different U.S. responses to its economic downturn may have been the government's only options, said Toronto Dominion Bank chief executive Ed Clark. He watched the debate unfold over whether and how to further stimulate the American economy -- first with the Fed's expansion of the money supply and now with the tax deal announced by the Obama administration.

Although the United States must attack its deficit, Clark said, doing it now would risk undermining growth in an economy that still is crucial to the world's overall economic performance.

That growth is important to Canada, the United States' biggest trading partner, and also to Toronto Dominion. In recent years the Canadian bank has pushed aggressively into U.S. markets, buying up weak local banks in New Jersey, Florida and the Carolinas, opening hundreds of branches and now making a monthly estimate of $500 million in U.S. mortgage loans.

"Given the size of the calamity that the U.S. had, and now that people are focused on saving and restoring their net worth, it is hard to see how the arithmetic allows you to avoid big deficits," in the short run, Clark said. "You have a dilemma that you want to solve the deficit in the long run, but if you want to be around to solve it you have to continue" spending to support growth.

Clark said that from TD's perspective things look good for next year. The bank is expanding its lending by roughly four percent a year -- not as fast as might be expected during a recovery, but quicker than competitors still struggling with the fallout from the mortgage and real estate crisis. Clark said his business clients are forecasting a strong year.

What he does not see -- and what's troubling -- is any quick progress on America's 9.8 percent unemployment rate.

Some of his U.S. corporate borrowers are predicting record profits, Clark said, but "they don't talk about record employment. They have found ways to survive and be more efficient. You may get recovery, but you may not get growth in employment." That, in turn, could keep the pressure on the federal government to try to boost the economy and push attention to debt and deficits even further into the future.

The other unknown is whether banks will be pushed into a more conservative mood by the new capital requirements being put in place for Europe and North America. Though the rules are meant to be phased in over several years, Clark said, investors and regulators may push for quicker compliance. That may cut profits and lending at weaker banks and even force healthier ones such as TD to choose between making new loans or socking money into their capital reserves even before the new regulations require it.

"TD could do that and say, fine, we are done," Clark said. "But I don't think it is in the interests of the economic system to say I am going to bring forward the timetable and meet all [the requirements] sooner rather than later. You are just locking up capital."

By Howard Schneider  | December 8, 2010; 12:07 PM ET
Categories:  International Economics, U.S. Economy  
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