Subprime loan problems have hit financial institutions globally since 2007. Many financial institutions have reported huge losses and had financial troubles. Among them, in the United States, Lehman Brothers filed for bankruptcy in September 2008, Bear Sterns was sold to JP Morgan Chase under Federal Reserve Bank pressure in March 2008, and there was a run on Indy Mac in July 2008.
The possibility of a credit crunch has been discussed since the summer of 2007 (e.g., The Japan Times, Oct. 13, 2007). Indeed, bank credit and loans and leases in bank credit in the U.S. had been increasing almost monotonically for years, and started decreasing in April 2008 (Figure 1). How can we cope with this creeping crisis? The purpose of this paper is to find prescriptions by learning from the Japanese experience of sharp decline in loans in the 1990s.