ON EVERY FRONT, ANXIOUS QUESTIONS AND DISCOMFITING ANSWERS
July 22, 2008
Since World War II, there have been 18 banking crises in industrial countries. The worst five were caused by changing lending standards or real estate bubbles (or often both) and cost at least 6 to 20 percent of gross domestic product (GDP) -- the U.S. equivalent of $850 billion to $2.8 trillion.
- Spain, 1977 (cost was 16 percent of GDP): A poor response to the oil shock of 1973 and weak bank supervision meant half of Spanish banks had solvency problems, and the government took over 20 banks.
- Norway, 1987 (cost was 8 percent of GDP): Deregulation led to problem real estate loans and banks had too little capital to absorb losses.
- Finland, 1991 (cost was 11 percent of GDP): Big increases in household debt and overly optimistic assessments of asset quality added to problems caused by the loss of exports to the Soviet Union.
- Sweden, 1991 (cost was 6 percent of GDP): Deregulation meant banks were able to make poorly documented loans without supervision, and a real estate bubble collapsed.
- Japan, 1992 (cost was 20+ percent of GDP): A sharp plunge in the real estate market caused bad loans to pile up, starting a stretch of stagnation known as Japan's lost decade.
Past banking crises can tell us what to expect in the future, says the New York Times.
- In the four years before the current U.S. crisis, home prices behaved much as they did in the worst crises of the past; if the trend holds, home prices will fall an additional 15 percent over the next three years.
- Big increases in the S&P 500 are expected to begin in 2009 -- two years after the current crisis began.
- The 580,000 private sector jobs lost from November 2007 to June 2008 pale in comparison with most of the past 11 recessions.
Source: Peter S. Goodman, "On Every Front, Anxious Questions and Discomfiting Answers," New York Times, July 19, 2008.
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