"A Quick Summary of the S & L Crisis Posted on: June 04, 2008
Written by: UWSA Staff There are two parts to the S&L crisis story. The first part involves the events that caused the S&L problem. This is the part that politicians will talk about. They would like us to believe that this is the whole story and frequently argue for this interpretation. The rest of the story involves the events that turned the problem into a major crisis and started costing you money. This is where the influence buying show up. Folks in Washington (and a few other places) would prefer that you didn't look too closely at this.
The initial trigger of the S&L crisis was the inflation of the late '70's. During this time, inflation reached such high levels that many S&Ls (which depended on residential mortgages for income) were losing money on fixed-rate loans which had been set up in prior years, and had interest rates well under the rate of inflation (meaning that the S&Ls were paying their customers to borrow money). In order to prevent the S&Ls from collapsing then, Congress allowed the S&Ls to diversify into riskier (and more profitable) commercial real estate and lending requirements were loosened.
The above accounts for about $50 Billion of the S&L bill. But anyone who says that the S&L crisis was due solely to economic factors is trying to hide something. The S&L crisis was caused by economic factors but was greatly exacerbated by five specific policy decisions:
- Lending requirements were loosened as described above.
- Deposit Insurance was raised from $40,000 to $100,000.
- Enforcement of the law by banking regulators was decreased.
- Politicians actively interfered in investigations of failing thrifts on behalf of specific S&L owners .
- Implementation of the solution was delayed until the industry itself couldn't possibly pay for it and taxpayers were stuck with the bill.
The sad thing is that most people still do not understand how they were robbed. Because this was a bipartisan robbery, both parties have cooperated in keeping this as quiet as possible and perpetuating the myth that it was due entirely to economic factors. They want you to pay up your $3000 S&L bill and forget about it.
If anyone wants to understand where their money went, I would recommend reading Inside Job by Steven Pizzo. It is a good read that will help you understand the S&L crisis and give you an insight into the HUD scandal, Whitewater, and politics in general. It should be required reading in all civics classes.