The 1982 Crisis
A financial crisis developed again in 1982. This time it centered on a crisis of confidence in the nation's commercial banks, which were threatened by losses on outstanding loans to U.S. businesses and less developed countries (LDCs). Adding to the financial strains in 1982 were the problems of the thrift institutions and the financial manipulations of a small Wall Street government securities firm.
The events of 1982 in turn were influenced by economic conditions during 1980 and 1981. It is to an understanding of these conditions that we now turn.
Like the recession in 1974-75, the recession in 1980 was very steep. Real GNP declined at an annual rate of over 9 percent in the second quarter. The sharp decline in economic activity led to reduced demands for credit. As a result, interest rates dropped abruptly from the lofty peaks they had attained in March. Corporations used the opportunity of lower long-term rates to lengthen the maturity of their outstanding debt.
However, this "window" of lower long-term rates was quite brief. To the surprise of nearly every forecaster, the trough of the recession was reached in July, and the economy began to recover in the third quarter. Real GNP increased steadily, and by the first quarter of 1981 it was expanding at an 8.7 percent annual rate.
With the increase in economic activity, prices again began to accelerate. The GNP price deflator increased at an annual rate of 10.9 percent in the fourth quarter of 1980 and 10.2 percent in the first quarter of 1981. Apparently inflationary expectations were quick to assert themselves after the brief recession of 1980.
The nonfinancial corporate sector increased its use of external funds in the fourth quarter of 1980, as the financing gap began to widen. Although the rise in stock prices in the second half of 1980 enabled corporations to increase their issuance of equity, they relied primarily upon bank loans. Business loans at commercial banks rose at an annual rate of 18.2 percent in the second half of 1980.
However, the reserves of commercial banks were under strong pressure during this period. The increase in prices and the reemergence of inflationary expectations prompted the Federal Open Market Committee (FOMC) to tighten monetary policy sharply.
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Book title: Financial Crises:Understanding the Postwar U.S. Experience. Edition: 2nd. Contributors: Martin H. Wolfson - Author. Publisher: M. E. Sharpe. Place of publication: Armonk, NY. Publication year: 1994. Page number: 76.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.