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Savings and Loan Crisis: For the edification of Kidpeat.

by Ziks511 / March 3, 2006 7:11 AM PST

The Savings and Loan Disaster.

"Public Policy Causes That Began in the Eighties


"Disaster struck after Paul Volcker, then chairman of the Federal Reserve board, decided in October 1979 to restrict the growth of the money supply, which, in turn, caused interest rates to skyrocket. Between June 1979 and March 1980 short-term interest rates rose by over six percentage points, from 9.06 percent to 15.2 percent. In 1981 and 1982 combined, the S&L industry collectively reported almost $9 billion in losses. Worse, in mid-1982 all S&Ls combined had a negative net worth, valuing their mortgages on a market-value basis, of $100 billion, an amount equal to 15 percent of the industry's liabilities. Specific policy failures during the eighties are examined below.

"An incomplete and bungled deregulation of S&Ls in 1980 and 1982 lifted restrictions on the kinds of investments that S&Ls could make.[]/b] In 1980 and again in 1982, Congress and the regulators granted S&Ls the power to invest directly in service corporations, permitted them to make real estate loans without regard to the geographical location of the loan, and permitted them to lend up to 40 percent of their assets in commercial real estate loans. Congress and the Reagan administration na

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As usual, you and your source completely fail to understand
by Kiddpeat / March 3, 2006 8:42 AM PST

what happened. That's why I wanted more specifics from you.

Why did Paul Volcker allow interest rates to rise so high? Remember the word 'stagflation'? Under Jimmie Carter, the US was simultaneously suffering from a lack of economic growth and inflation. I am not enough of an economist to know how Jimmie pulled that off, but he did. Volcker used a classic response to inflation which was to let interest rates rise. That did further stifle the economy, but only for a relatively short period of time. After the strong medicine had done its work, interest rates came down and economic growth resumed.

The higher interest rates occurred in the banks, and other financial institutions. They did not occur in the S&Ls which were restricted by regulation in the amount of interest they could pay. Bank passbook accounts were also restricted, but not money market and other financial instruments. That meant that individuals could put their money into high rate money market and other accounts. This literally sucked the deposits out of the S&Ls because they could not offer the higher rates. They were forced to obtain funds from other high yielding, short term sources of funds.

Regulatory authorities, as you might expect, came under heavy pressure from the S&L industry to lift its rate caps. They were trying to stem the outflow of their deposit money. The rates caps were lifted as a result of this, and may have had some effect on slowing down the flow of money out of the S&Ls.

The problem was that the S&Ls were still stuck on the asset side with low paying mortgage loans. Their assets could not pay for the increase in expense of their source of funds. This is what caused them to move into riskier, higher yielding assets.

Jimmie Carter started the problem by creating the situation where the action that Volcker took was needed. The S&Ls were a ticking time bomb that finally exploded in an era of high interest rates. Prudent bankers know that you don't fund long term assets with short term sources of funds. That's what the S&Ls had done under the supervision of, mainly, Democrat administrations. The reason that you don't do that is something called interest rate risk. If you mismatch the maturities of your assets and liabilities, you risk losses if short term and long term interest rates move in the wrong direction. If you have long term assets, like mortgages, you need long term sources of funds to fund them. Your profit is then based on the spread between the sources and uses of funds, and is protected because the maturities of sources and uses are matched.

The S&Ls were not viable as financial institutions because of this fundamental mismatch which is ultimately what did them in. Deregulating the rates they paid did not change their situation. Once their deposits began flowing out, they were dead.

It was Jimmie Carter who caused the economic climate that resulted in the onset of higher interest rates. It was Ronald Reagan and Paul Volcker who laid the groundwork for the longest, peacetime expansion of the US economy in history.

That's the way it was. How do I know? I was there working in a bank at the time. I watched it happen.

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No sources, no documentation, just your experience working
by Ziks511 / March 3, 2006 10:24 AM PST

in a bank. Your usual bang-up research job, KP. Sure you couldn't find a 19th century illustrated history of the Savings and Loan Crisis that proved it was all Jimmy Carter or Lyndon Johnson, or Andrew Jackson or somebody?

You're the one who kept asking for documentation, but when its presented to you, you twist and turn and go pretzel shaped.


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No, I didn't ask for documentation. I asked for specifics
by Kiddpeat / March 3, 2006 1:00 PM PST

beyond the usual generalities. You have now proved that you have zero understanding of the S&L fiasco.

Any hack can pull up whatever blurb you want on this subject. Pulling up an article doesn't show any understanding of the subject, and it doesn't mean that the article is correct.

Do your comments mean that you are now going to document what you write rather than making everything an opinion dump?

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I leave opinion dumping entirely to you KP.
by Ziks511 / March 4, 2006 4:59 PM PST

You provided no specifics, just your opinion. The article which at least has some authority to it, confirmed what I and virtually everybody else understood to be the truth at the time, that Reagan's deregulation coupled with his vigorous downsizing of any and every regulatory agency contributed to the disaster. There are lots of other articles citing similar evidence and leading to the same conclusions. And the article I posted did not exclusively blame Reagan, it cited lots of other factors as well from previous administrations. But the article suggests and I believe that Reagan's actions pushed the crisis over the edge.

You have a different opinion, fine, back it up with something besides gut feeling, offer an iota of evidence that Reagan's deregulation and hostility to government regulation particularly of the monetary sector did not contribute significantly to the S & L crisis.


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Rational argument, as usual, is met by insults and slurs.
by Kiddpeat / March 5, 2006 5:00 AM PST

That is what I have come to expect in these exchanges, so it is no surprise to see them.

I presented a reasoned analysis of what happened to cause the S&L crisis. I discussed the history, briefly explained the concept of interest rate risk and gap management, and showed how the financial structure of the S&Ls was untenable to start with. I explained why deregulation had little or nothing to do with the S&L collapse. I also explained that I was speaking from an insiders point of view. I knew and spoke with the money market traders throughout the early parts of the S&L collapse. That includes the period when interest rates were spiking. The Chief Economist of the institution I worked for served as Under Secretary for Economic Affairs during the Reagan administration. I heard him speak on several occasions. I graduated from the Banking School at the University of Wisconsin in Madison during this period. I watched via the press, particularly the Wall Street Journal, during the entire period.

There are times in life when you learn history, and the reasons behind it, from personal observation. You don't always get it from a textbook or an article on the internet.

You seem unable or unwilling to learn. You, apparently lacking the ability to refute what I've said, resort to labeling my comments as mere opinion, and opinion which is wrong to boot. This, of course, is not the first time you've done this. You tried much the same thing in the original debate regarding the War of 1812. The difference in that debate was that I was not relying on my own observations, but the observations of a contemporary historian and other historical observations.

In the current case, you originally said;

People hit by the Savings and Loan mess (a direct result of Reagan's deregulation)

and then went on to amplify this as;

{the deregultion was on the} degree of risk financial institutions could assume in their investments. Additionally in cutting oversight by underfunding the departments concerned.

You then finally put more meat on it in this thread. so, your basic thesis is that Reagan caused the S&L crisis by deregulating the amount of risk S&Ls could take on their investments.

I then showed you how it was the financial structure of the S&L industry which caused its failure in the high rate environment triggered by Jimmie Carter's irresponsible behaviour.

Are you still with me? Hang in there.

Up till now, I assumed that you honestly quoted your source. I also thought, due to your use of bolding, that he said;

Virtually all of this except the Paul Volcker squeeze on the money supply was the result either of Reagan's general policy of deregulation, and deregulation of the Savings and Loans or of his loosening of Federal regulations, or of his war on Federal Regulatory Agencies themselves, both in terms of their budgets and in terms of personnel.

He didn't say that at all! YOU did! That's your opinion which you claim was 'common knowledge at the time'. So, my opinion is useless ignorance, but YOUR OPINION is common knowledge. Interesting how arrogance works isn't it.

What your quoted source actually said was;

Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis because deposit insurance was actuarially unsound from its inception. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for years. No sound insurance program would have done that.

It's funny how you missed that point. He says deregulation was not the root cause. He agrees with what I said about the unsound financial structure of the S&Ls.

Borrowing short to lend long was the financial structure that federal policy effectively forced S&Ls to follow after the Great Depression. S&Ls used short-term passbook savings to fund long-term, fixed-rate home mortgages.

That's what I said.

Regulation Q, under which the Federal Reserve since 1933 had limited the interest rates banks could pay on their deposits, was extended to S&Ls in 1966. Regulation Q effectively was price-fixing, and like most efforts to fix prices (see Price Controls), Regulation Q caused distortions far more costly than any benefits it may have delivered.

That's one of the things Reagan got rid of as I said.

Interest rate restrictions locked S&Ls into below-market rates on many mortgages whenever interest rates rose.

That's what I said.

So, your source confirms my observations, and says virtually nothing about Reagan's deregulation causing the problem.

I fully expect you won't learn from this Rob. I think you are not teachable. That's your loss, and a poor quality in a wanna be historian.

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If "A" spills wine on a yellow carpet ...
by Evie / March 5, 2006 5:12 AM PST

... and "B" uses a cleaner that turns out to bleed the color on the rug, who ruined the carpet? This is how I see the S&L crisis. Reagan's policies may well have contributed somewhat to the whole debacle, but that is because we can never predict with certainty the result of any policy, etc. The ultimate blame, however, lies with the action that set the ball in motion -- "B" would never have used a cleaner that bled the rug if "A" hadn't spilled the wine to begin with. Even Rob's bolded excerpt puts that ball in motion in 1979, so his initial assertion of "direct result of Reagan's ..." statement is NOT supported by his current documentation.

Sadly you have probably wasted your time composing that well reasoned post KP.

Evie Happy

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Yes, I'm pretty sure I did waste my time, but I hate to
by Kiddpeat / March 5, 2006 3:33 PM PST

leave things hanging when they're begging for a response. It's a character flaw.


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by Glenda / March 3, 2006 12:49 PM PST

It would be nice just ONE time to see a post from you with out all the zingers directed at our Presidents!!
One of these days I will leran to not read anything from you:(

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I have posted laudatory comments about FDR, Eisenhower,
by Ziks511 / March 4, 2006 4:39 PM PST
In reply to: Rob......

Kennedy, Johnson, and Bush 1. Don't expect me to like Nixon, or Reagan, or Bush 2. I think they all have violated both the law, and the Constitution. I wasn't a big fan of Clinton, because of the Lewinsky thing, but he did alright particularly economically which I'm sure nobody here is likely to agree with. I don't like the post Goldwater "Extremism is no Vice" Republican Party. I especially don't like the post Reagan, neo-con "spend all the money so the Democrats can't do anything if they get elected" Republican Party. I think the current administration is epitomized by its response to 9/11 (letting all the well connected Arabs fly out of the US when nobody else could) and by their response to Hurricane Katrina which I think shameful. A disaster like that is far larger than anything either the New Orleans city government, or the Louisiana State legislature could deal with. Everybody here at SE wants to dump all the blame on Democrats if they can, but the response from Bush's Administration was wretched and glacially slow.

You guys have no trouble slagging Democrats and Clinton in particular, I'm just playing by the rules you set up. I'm complaining about people I think have done a bad job in office.


Before anyone posts: yes, I know the Goldwater quotation is truncated, but it expresses both the actions of the Reagan and Bush 2 Administrations, and their spirit.

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