The protracted and large credit expansion that occured prior to 2008 is difficult
to explain using current, mainstream macroeconomic models.
This phenomenon simply cannot occur with rational, forward-looking
agents with complete information. We propose that such
excessive expansions are caused by inertia associated
with long-term contractual loans.
The lags and rigidities of such loans introduce
system memory, or path dependence, that can create prolonged 
off-equilibrium transition paths even in a frictionless setting 
with complete information available to all agents. 
We present a macroeconomic monetary-flow model in which
a loan portfolio is held by a financial sector
that generates credit for the acquisition and production of capital.
These contractual loans span several years, and account
for transition paths of comparable length.
System memory like this produces effects not present in most other models.
Specifically, credit expansions and contractions are asymmetric
with generally smooth expansions and more sudden, disruptive contractions;
and inflation changes the real interest rate.