Communing with Disaster: What We Can Learn from the Jusen and the Savings and Loan Crises

Rubin, Edward L., Law and Policy in International Business

Now that the Japanese economic miracle has soured into the Japanese economic meltdown, scholars are confronted with a new challenge: instead of trying to penetrate the secret of Japan's success, they must try to unravel the enigma of its misfortunes. Professors Curtis Milhaupt and Geoffrey Miller have performed a great service in documenting one of the most dramatic of those misfortunes--the collapse of the jusen companies.(1) Professor Shinsaku Iwahara has also performed an equally valuable service by placing this event in the larger context of Japanese politics and society.(2) But despite its record-setting scale, the jusen problem was not unprecedented; Japan merely followed in the footsteps of its economic mentor, the United States, which experienced a very similar financial meltdown about a decade earlier. This Commentary briefly describes that event, the U.S. savings and loan crisis, and then draws some tentative conclusions on the basis of the comparison.

I. THE COLLAPSE OF THE SAVINGS AND LOAN INDUSTRY

Savings and loan institutions are generally defined as financial intermediaries that receive deposits from individuals and extend residential housing loans. Such institutions existed in the United States before the U.S. Civil War,(3) but their rapid development was the product of the latter part of the nineteenth century and the result of the monetary policies that prevailed at that time.

During the Civil War, the United States had adopted a number of dramatic measures to finance the enormous cost of its military efforts against the rebelling southern states. It chartered national banks which were authorized to issue notes as circulating currency, it issued the nation's first non-redeemable paper currency since the Revolutionary War, and it sold a large number of long-term bonds.(4) Once the war ended, a debate began about whether these "soft money" policies would continue, or whether the nation would return to the more restrictive practices that had previously prevailed. There was a strong economic argument, at least from the perspective of hindsight, for a soft money policy, because the United States was about to enter a period of extraordinary growth that would have readily sustained major expansion of the money supply without devaluing the currency. But a variety of factors conspired to impel the national government to reject that policy in favor of a more restrictive, or "hard money," approach. The size of national bank note issue was limited, while the paper currency issued by the national government itself (the so-called "greenbacks") was made redeemable in gold.(5)

One consequence of this policy was a persistent shortage of money and credit throughout the last several decades of the nineteenth century. Because of the collapse of the South's banking system resulting from its defeat in the Civil War, and the absence of banks in the recently settled and still partially wild West, most of the established banks--and most of the money--were in the northeastern and midwestern states. These banks naturally extended credit to borrowers in their vicinity; presumably, the cost of obtaining credit information was lower because the borrowers were closer, better known, and on the average, more credit-worthy. This phenomenon, when combined with the general shortage of money and credit, meant that the South and West were perpetually credit-starved. Business borrowers could avoid these regions, preferring to locate in the parts of the country where credit was available, but ordinary people continued to live in the South, and to pour into the vast farmlands of the Great Plains. In the South, they often became tenant farmers, borrowing from their landlord against their next year's crop at exorbitant prices, and consigned, because next year's crop never provided sufficient funds, to perpetual debt.(6) In the West, they often managed without credit by living as subsistence farmers on their relatively extensive lands.(7) Increasingly, however, people in these regions turned to savings and loan institutions to slake their otherwise unsated credit hunger.

The savings and loans were typically organized as self-help organizations in a particular locality. People who had obtained modest amounts of excess funds, but lacked convenient investment opportunities, would deposit their funds in the savings and loan, which would then extend long-term residential housing credit.(8) These institutions prospered because of the familiar life cycle phenomenon: people tend to need credit when they are starting out in life and to acquire excess funds as they get older. The savings and loans can thus be regarded as intermediating between the old and the young, or, more conceptually, between each person's young adulthood and old age. Because they arose to fill a financial void, and because they did so rather well, the banking system of many southern and western states soon came to consist largely of these local, consumer-oriented institutions. Not surprisingly, the laws of these states were often designed to favor such institutions and to shield them from competition.(9)

When the Great Depression came, the thinly capitalized savings and loans were hit hard. Indeed, they were hit so hard that even the Hoover Administration was motivated to enact regulatory legislation to protect them.(10) This legislative scheme was quickly expanded under the Roosevelt Administration.(11) What emerged was a system of national chartering, which ultimately enrolled about half the nation's savings and loan institutions, plus an insurance fund which covered the great majority, both state and federal. The chartering process was managed by the Federal Home Loan Bank System (FHLBS), modeled on the previously established Federal Reserve System, with twelve regional banks and a central administrative body located in Washington, D.C. The insurance was provided by the Federal Savings and Loan Insurance Corporation (FSLIC), …

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Publication information: Article title: Communing with Disaster: What We Can Learn from the Jusen and the Savings and Loan Crises. Contributors: Rubin, Edward L. - Author. Journal title: Law and Policy in International Business. Volume: 29. Issue: 1 Publication date: Fall 1997. Page number: 79+. © Georgetown University Law Center Fall 1997. COPYRIGHT 1997 Gale Group.

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