Over the last ten years, Nordic banks have increasingly established operations in other countries in the region and have begun to offer their services to households and companies across national borders. Swedbank, for example, accounts for almost 45 per cent of total lending in Estonia, while SEB accounts for  1  I have chosen to define the Baltic region as Sweden, Denmark, Finland, Northern Germany (i.e. the federal states of Schleswig-Holstein, Mecklenburg-Vorpommern and Hamburg), Poland and the Baltic states – Lithuania, Latvia and Estonia. 2  Refers to the population of EU25. BIS Review 105/2009  1  30 per cent of lending in Lithuania. 3 Prior to the beginning of the crisis, the operations in the Baltic states also generated an increasing proportion of the earnings of these two banks (see Figure 1 and Table 1). Other major players are Nordea and Danske bank, which can now regard practically the entire Baltic region as their domestic market. This financial integration has many economic advantages, but it also poses major challenges. I do not intend to discuss this further here, but will simply say that when the financial systems of different countries become intertwined, the risk increases that problems will spread across national borders. As far as Sweden is concerned, this has resulted in a decline in confidence not just in the Baltic economies but in the Swedish economy too. This is because there is a risk that developments in the Baltic states will entail substantial loan losses for the Swedish banks.
My purpose today is to explain how this recession differs from the others I have lived through, why that calls for a wider range of responses than normal, and the difference between the policy objectives in the medium term and the short term. The boom before the bust? What is striking about the run-up to this recession is that we did not see the booms in output, employment and wages that led to past recessions. Past recessions, in good measure, reflected deliberate decisions by policymakers to rein in spending and damp the inflationary pressures that had been building up. The rise in interest rates then led to a correction in the spending behaviour of households and companies as optimism about future income growth in the boom turned to uncertainty and gloom in the bust. Chart 1 highlights what was happening to domestic output in the two years before the last three recessions. The Barber Boom was a case in point, when output rose by 10% over the  BIS Review 5/2009  1  year to 1973 Q1, and then fell by 3% over the following year. You can see a similar pattern before the recessions of the early 80s and early 90s. But in 2006 and early 2007 growth was close to its average over the past 30 years. That is not the whole story of course. When we look at asset markets, a different story emerges.