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Everyone seems to be wagging their fingers right now at the banks for not learning the lessons of the S&L crisis in the 1980’s.
Oh, Contraire. As the Becker-Posner blog points out, the banks DID learn lessons from the S+L crisis. A grossly abbreviated summary: thrifts and S&L’s made spectacularly bad loans, betting big on one asset class. When the asset class (largely land and partly junk bonds) didn’t pan out, S&L’s started to die. They were hyperleveraged, which should be legal. What is incorrect is the explicit and implicit guarantees that the federal government makes to the millionaires that make big and unsustainable bets.
Without batting an eye, the government stood up to cover the bets that they made. What’s more, without batting an eye, we subsidized incompetence, fraud, malfeasance, corruption, stupidity, greed, and idiotic regulation. Regulation caused the S+L crisis: remember, the depression’s bank failures caused the government to severely limit the menu of products that Thrifts/S+Ls could invest in. When the menu was expanded, it was still relatively limited. The thrift managers didn’t have access to the entire market, just a basket of products and programs, suggested by lobbyists, and acceptable to the Carter administration. FDIC insurance gives the government the right to be part of the conversation, as they become stakeholders.
Sound Familiar?
Betting big that land would continue to appreciate 20% and more, S&L’s allowed all sorts of land speculation in exchange for high interest rates. Underwriting guidelines went from prudent to, "aww,hell, he says he’s good for it–what’s the harm?" Somehow, nobody is willing to believe any market cycle can possibly come to an end. Ever. So when the land’s price and it’s utility got far enough apart, the market lost its appetite, and the S&L’s lost their capital.
Not wanting to let these thrifts implode, the government decided to give the millionaires money. Lots of money. Because, hey, we can’t let the banks collapse, now, can we? They need the money, or else the capital markets will totally seize up! Community banks were what we were saving in the 1980’s.
Today, it’s Joe Homeowner. He’s the hostage–or front man–we must protect. Because when we bail him out, we’re also going to see a bunch of bankers that made these investments breathe a sigh of relief.
And the beat goes on.
P.S. Go Buckeyes. And Jim Delany? Come on, allow a playoff already.
When not rooting (in vain) for the Buckeyes to win the BCS championship game, Chris Johnson runs the Ten Day Team at First Ohio Home Finance
