Current Credit Crisis Vs. Nordic Crisis Vs. Great Depression ~ market folly

Wednesday, October 8, 2008

Current Credit Crisis Vs. Nordic Crisis Vs. Great Depression

Contrahour has a post up detailing the events of the Nordic Banking Crisis in 1992. Why is this relevant? Because its eerily similar to what we're currently seeing in America.

Taken from Contrahour,

"In 1985, the government deregulated banks which caused a competitive frenzy for new loan growth. The increase in credit availability created a real estate bubble as more individuals began speculating in real estate. At the tail end of the five-year real estate bubble during which asset values increased by over 100%, banks became giddy with rising profits and loosened lending practices. The economy boomed to the point where unemployment dropped to 1.4% in 1989.

But then, in 1990, banks suddenly found themselves in dire straights as the bubble burst and asset prices began falling. Three of the six major national banks were undercapitalized in 1991 because of the falling asset values backing the loans. Several banks experienced "runs" on their deposits. In the Fall of 1991, Gota Bank, one of Sweden's major banks declared bankruptcy.

As a response, the government of Sweden created a government-owned institution, a "bad" bank, if you will, to liquidate the troubled mortgages and loans from two of the six national banks. This bank, named Securum Bank, gave the government time to work out the troubled loans without being at the behest of the stock and credit markets. In addition, the governemnt guaranteed that it would inject capital into any other bank the fell below the nine percent regulatory capital requirement. In essenece the government became both a buyer and investor of last resort.

The "bad" bank worked out the troubled loans through asset sales, IPOs and restructurings. The plan was a success. While it could not avert a recession, the liquidity injections prevented the credit crunch from reaching more of the private sector. Securum, the "bad" bank, was closed in 1997, just five years after the crisis reached its peak. While the "bad" bank was capitalized with 65 billion kronas of government money to buy loans, it ended up not needing any additional capital and turned out to break even in the five years of operation."

And then compare all that to America in the 1930's:

(click to enlarge)

Source: Contrahour

blog comments powered by Disqus