Monetary Policy in the 1980s: How Bank Credit was Determined

In Chapter 16 it was found that the strong growth in bank lending during the 1980s was the main cause of asset price movements in the 1980s and early 1990s. Further, in Chapter 15 it was shown that the weak credit growth of the 1990s was the cause of the recession. The weak lending of the 1990s was due to banks’ substantial bad debts, which rendered them risk averse, thus increasing the always present rationing in the credit market. These findings motivate interest in the question why banks increased their lending so aggressively during the 1980s. Moreover, in the previous chapter the issue of how to avoid moral hazard was raised. Also for this purpose and the formulation of suitable policies it is necessary to identify the cause of the rapid bank lending of the 1980s and identify those who are responsible for it. It is this question that will be examined in the present chapter.