When the sub-prime crisis hit in 2007, we were all bombarded with stories about how this showed the effects of deregulation run amok.  Never mind that the housing and banking industries are heavily regulated, the crisis showed we had the wrong kind of regulation.  Or perhaps it showed that the Bush administration never had their heart in regulation, so they let the banks get away with murder.  I think it’s a bit more complicated than that (Bush did try to rein in Fannie and Freddie) but obviously Bush wasn’t keen on discouraging banks from making housing loans.  Just the opposite, he wanted to create an “ownership society.” 
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You may recall that a week ago I made a sort of “Emperor has no clothes” accusation against the economics profession.  I claimed that economists are always talking about “easy money” and “tight money” without have any coherent definition, indeed not even knowing that they have no coherent definition.  In this post Bob Murphy challenges my dismissal of real interest rates as the proper indicator.  He makes some good arguments, which I will address as well as I can, but in the end I am still left with 4 reasons for dismissing the view that real interest rates provide a useful indicator of the stance of monetary policy.  Furthermore, I think that any one of these four arguments would be sufficient to prove my point:
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Nick Rowe has some very useful info on the Canadian banking system.  I heard on NPR that during this crisis Canada went from having zero of the top 50, to having 5 of the top 50 banks in the world (in market cap.)  And they have only 33 million people.  I am a pragmatist, so that sounds like a good system.  Even the one regulation that is tighter (capital requirements) makes sense given the moral hazard from FDIC, too big too fail, etc.  Seems Obama is also a big fan of the Canadian system.  Maybe he’s a pragmatist too (let’s hope so.)

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The Economist has a recent article about the German “banking disaster”:

IT PUZZLES many in Germany that the country’s punctilious parsimony and restrained housing market have not saved it from a banking crisis that seems every bit as bad as those suffered by spendthrifts abroad.

I guess this is a puzzle for those who still think the American banking crisis caused the sharp fall in AD last fall.  For those of us that have always seen the causality going the other way—from falling AD to a weakening banking sector—it comes as no surprise at all.

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For the past 25 years one of commuting’s little pleasures has been waiting at the traffic light in Watertown Square and admiring the architecture of the local bank (built in 1921.)  Unfortunately the links here and here don’t even come close to doing it justice, as it has the sort of deeply recessed arches associated with Alberti’s church in Rimini.  By the 1950s and 1960s, bank architecture had begun to reflect the aesthetics of the strip mall.  How did that happen?

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