During the 1970s, the US banking system stood as an intermediary between oil-exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro-dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks. It is true that this time, a large volume of petro-dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing. Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States’ own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worthy borrowers within the united states. The final claimant is different, but in many ways, the mechanism is the same.

— Rogoff and Reinhart: Is the 2007 US Sub-Prime Financial Crisis So Different?

And a potential model for understanding the current crisis through the prism of the Nordic banking crisis and Sweden’s experience

Norges Bank Conference on Banking Crisis Resolution – Theory and Policy, Oslo 16 June 2005

The circumstances, going into the crisis:

• Deregulation
  • “in early 1984 – the government started a process of swift removal of credit regulations”
• Monetary & Fiscal Policies – low interest rates, high spending
  • “Real estate growth peaking at ten percent in 1985!”
• Lending Growth
• Prudential capital regulation – general erosion in banks’ capital base
• Supervision
  • “on-site inspections decreased sharply – from 57 in 1980 to 8 in 1987!”

The Banking Crisis

“With the benefit of hindsight, the banking crisis was an “accident waiting to happen”. And sure enough, when the economy was hit by a strong negative shock and a cyclical downturn, loan losses and non-performing loans soared, wiping out the capital of many banks.”