Savings and loan institutions, like the investment banks today, borrowed
short and lent long. In this case, people put their savings in the
banks and the banks lent out money on 30 year mortgages. To prevent
gouging and make mortgages affordable, the Savings and Loans were
prevented from paying interest rates high enough to keep depositors from
exiting, which could make them bankrupt.
The Reagan administration, including daddy Bush, moved to deregulate the
Savings and Loans. Given this newfound freedom, crooks and nincompoops
(including President Bush's younger brother) rushed in to take advantage
of profiting from other people's money. As the scope of this disaster
was becoming obvious, five senators, including John McCain along with
Alan Greenspan (perhaps the Godfather of the recent financial crisis),
rushed in to defend one of the more egregious Savings and Loan
operations run by Charles Keating. Oh, yes, a small savings-and-loan in
Arkansas, which was connected with Bill Clinton (who allowed Congress to
deregulate the current financial system, led by Senator Phil Gramm, John
McCain's chief economic adviser) also ran into difficulties.
The savings-and-loan scam crashed leaving the government to pick up the
pieces at a cost that is still debated, but which was still well over
$100 billion -- pocket change today.
The difference today is that our politicians will really do excellent
regulation this time, just as they did with Sarbanes-Oxley in the wake
of Enron.
--
Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901
www.michaelperelman.wordpress.com
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