History shows US bank lending will be soft for years

Marshall Auerback here. I have a quick thought regarding the credit crisis and bank lending in the US.

If the real purpose of the Paulson Plan is recapitalization more than reliquification, and if the Scandinavian public recaps of their banking systems can be held up as a successful example, then it may be worth taking a quick glance at Finland’s experience, as offered by DrK below.

Bank lending didn’t really pick up until 1996-7, some 4-5 years after the recaps were initiated. Home prices remained shaky for a similar duration. So best be careful about concluding that a quick fix is in the cards – and MSE suspects the Scandinavian bank balance sheets were neither as leverage, nor as stuffed with complex financial instruments, as U.S. banks were nearly two decades later.

Did the public recaps yield a surge in inflation? Quite the contrary. But notice that GDP growth was able to expand while bank lending was still contracting. Scandinavian economies tend to have more global trade exposure than the US, and we wouldn’t be surprised if the GDP growth revival has something to do with sharp trade balance improvements, which are easier to pull off in countries smaller than the US, which after all was the global spender of last resort.

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