By MARY ANASTASIA O’GRADY

When Canada hosts a meeting of the G-20 in Toronto today it will offer no apologies for the country’s reputation as boring. Indeed, it will hold up its stodginess as a virtue.

“If Canada’s financial system is boring,” Canadian Finance Minister Jim Flaherty wrote in the Financial Times in November 2008 as global financial markets were coming unglued, “perhaps the world needs to be more like Canada.” “Few countries are as dependent on trade or as integrated into the global financial system as Canada,” Mr. Flaherty continued. “Yet our financial sector continues to weather the turbulence better than many other countries. This did not happen by chance.”

Canada did not have a banking crisis in 2008 and, despite its vulnerability to U.S. economic weakness it emerged from recession in the third quarter of last year. With roughly the same population as California and the equivalent of Brazil’s GDP, our northern neighbor is now leading the pushback against the tax-and-spend agenda of some of the more powerful members of the G-20.

Mr. Flaherty was in New York this week talking up the Canadian economy at the consulate, where I cornered him for an interview. I started by asking him how his country avoided the mistakes that led to the housing and banking crisis in the U.S.

“One of the fundamental reasons is that Canadian banks, the lenders on residential mortgages, lend and hold,” he begins. “Someone getting a mortgage normally meets with a live human being in a bank branch and [the bank] will know something about the person before it makes the loan.” Banks don’t sell them, either, he adds; “there wasn’t that repackaging securitization—selling the loans—that happened a lot elsewhere.”

On the flip side, borrowers can’t treat their obligations lightly, as is too often the case in the U.S. “Someone can’t just walk away from a home with a mortgage,” Mr. Flaherty says. “They remain personally liable [for the loan] and that makes a big difference.”

He also points out that the Canadian tax code “does not encourage excessive risk-taking in home ownership because the mortgage interest is not deductible.” For “politicians [deductibility] has a lot of attraction. But it’s bad policy,” he says, because it encourages home buyers to take on more than they can handle. Instead Canadian tax law tries to reward home ownership by making the capital gain on a principal residence tax deductible. “But that’s at the end, not at the beginning of a real-estate relationship,” Mr. Flaherty says. This, he contends, tempers the appetite for risk.

Yet it wasn’t only that American home buyers took on too much risk. Many investors in subprime loans thought they were buying a sure thing and the quasi-government agencies known as Fannie Mae and Freddie Mac played no small role in encouraging that perception. How come the Canadian Mortgage and Housing Corporation (CHMC), which is the Canadian version of Fannie, didn’t do the same?

The CHMC is not a government-sponsored enterprise; it is, Mr. Flaherty says, “a government agency” and that means “we watch quite carefully what risks they take.”

The size and scope of the agency, moreover, is far less ambitious. Fannie, Freddie and the Federal Housing Administration had, in June 2008, more than 50% of the subprime borrowers’ market in the U.S. The Canadian government, by contrast, keeps CHMC on a short leash.

“They are supposed to have a certain part of the market but they are not supposed to be a dominant player in the market,” Mr. Flaherty says. They do make sure that lower income earners have access to a roof over their heads, but that can mean rental housing. “It doesn’t necessarily mean encouraging people to have title to a house and to have a mortgage.” Even so, it is worth noting that Canada’s home ownership rate of 68% is roughly equal to the U.S.

In the aftermath of the housing mania, some members of the G-20 want Canada to kick in on an international bank tax. (Mr. Flaherty mentions Germany, France, the United Kingdom and the U.S., although he quickly adds that “President Obama in his most recent letter did not specifically reference a tax like that.”) The minister is opposed.

“The major division,” he says, “is between those countries that had to put taxpayers’ money into their financial institutions or nationalize them and those countries that did not.” Among leading members of the G-20 only Canada and Japan are against the tax, Mr. Flaherty says. But he adds that “the Asian countries that did not have to use taxpayers’ money are not going to agree to” it, either.

In his own country, the tax is an impossible political sell. “We already tax [our banks] a lot,” Mr. Flaherty says. Now Canadians are being asked to “impose a new tax on them which they are going to pass through, as a cost of doing business, to Canadian bank customers who are then going to get to pay for bank failures in other countries in the world. It makes no sense.”

An equally big problem is the purpose of the tax. While there are “different proposals,” Mr. Flaherty says that “one or two of the European countries would put the money into general government revenues.” That doesn’t pass the laugh test with the minister, who chuckles as he says it. “I’m a finance minister. If you’re running a deficit and you’re taking money and putting it into your general revenues, you’re going to use it to pay down the deficit or you’re going to use it for some social program or something.”

While Canada agrees “with the principle that to the extent a financial institution contributes to a crisis, its shareholders and debt-holders should bear the cost and not taxpayers,” the question of how to do it remains. The minister mentions the possibility of “a contingent capital alternative where there would be capital available if a crisis was triggered at a particular institution” but “that capital would be left with the institution.”

But when I point out that the institution still would have to put the capital aside, he says, “That’s right,” and quickly goes to what seems to be his favorite option: “We could just make sure we get the capital standards right and the leverage right,” he says in a tone that suggests common sense would be a novel idea for some. “That worked for us.” He worries that a tax providing for future bailouts would be “the classical creation of moral hazard.”

Canada never had the equivalent of Glass-Steagall, which separated investment banking and retail banking in the U.S., and Mr. Flaherty says he thinks it was “fortunate that government policy allowed our commercial banks to acquire the investment banks in the late 80s and early 90s.” He says that lowered risk.

“They came under the same regulatory regime—the superintendent of financial institutions—and the same leverage and capitalization rules,” he explains. “Though they were operating within the commercial banks as investment entities, they were subject to the same regulation and the same effective supervision. Our superintendent watches financial institutions carefully.” Of course Canada is not an international banking center.

At today’s meeting, Canada will also oppose the U.S. strategy calling for more deficit spending around the globe. When I suggest that this hawkish stance has something to do with his country’s debt crisis in the 1990s, Mr. Flaherty recalls the details. “Canada’s debt-GDP ratio was something like 77% at the time and the IMF was threatening to come in. It was a great national embarrassment.” A provincial minister at the time, he remembers the pain of the sharp cuts to education and health services. Mr. Flaherty says he would have done things differently, but “leaving aside how it was done” the fact is “it’s tough medicine” and to get it done “there has to be a public willingness to take the hit.”

In “some of the European countries,” he says, it is not clear “whether there is public will to accept fiscal discipline and the reduction in social benefits.” Ireland is showing “the most resolve.” Elsewhere in Europe, “people are demonstrating in the streets, fighting to be able to retire in their 50s and asking other countries where the retirement age is much higher to help pay the cost of that.”

The key to getting back on track, he says, is that “you must have a credible plan to move back toward reasonable debt-to-GDP ratios, to get your deficit spending under control,” and it must be “within no more than an intermediate period of time,” in order for markets to buy into it.

Returning to the 1990s crisis, Mr. Flaherty says the experience led to a fundamental change in Canadians’ “public perception” about government debt. “There was a realization that you have to pay the piper eventually,” he says. “It took the country getting into a lot of trouble” to get to that, but when the cost of servicing the huge debt started to eat into government services, people woke up. In Europe, he says, there needs to be that change in “public perception about what government can do for them and what they need to do for themselves.”

These views have not shielded Mr. Flaherty from free-market critics who say that Canada’s current stimulus plan has done nothing for the economy. He defends the government’s actions, maintaining that the money was spent on necessary infrastructure projects, had a multiplier of 1.5, and created or saved jobs. That’s a bit hard to swallow from a finance minister who has made tax cuts—both corporate and individual—the centerpiece of his tenure and professes a belief in limited government. So I push him on his claims.

“At the end of the day, being pragmatic, when you’re faced with a country going into a recessionary dive as we were in the last quarter of 2008, that is not internally generated, that comes from outside the country, what do you do?” Doing nothing, he says, could have meant a longer and deeper recession and more unemployment. They had to decide whether “to stimulate the economy with government money, with taxpayers’ money, to replace the absence of private demand or not. We made a decision pragmatically to do it, to limit it to two years, [and] to say so from the beginning.”

That’s not flying with Canada’s economic liberals, but to American ears it sounds downright libertarian. Mr. Flaherty is also a proponent of a strong Canadian dollar and the champion of a recent unilateral tariff reduction that will remove “thousands of tariffs on inputs for manufactured goods” by 2015. Last week his government ratified the Canada-Colombia free trade agreement.

Tax cuts, limits on stimulus spending, a strong currency and freer trade. Who says Canada is boring?

Ms. O’Grady writes the Journal’s Americas column.