Magazine article Modern Trader

Solution of S&L Problem Important for Economy

Magazine article Modern Trader

Solution of S&L Problem Important for Economy

Article excerpt

Solution to S&L problem important for economy

Prospects for a U.S. taxpayer rescue of some 500 insolvent savings and loan (S&L) institutions and another 1,000 troubled thrifts present the first major budgetary hurdle for the new administration of George Bush and the U.S. Congress.

Analysts agree the politicians cannot drag their feet on reaching a quick, gimmick-free solution for an industry that is losing about $1 billion a month. How this problem is resolved may have a bearing on the budget deficit issue, which is perceived to be one of the biggest matters the new administration must handle.

According to Bert Ely, president of Ely & Co., a move to keep the costs of a federal bail-out off budget will prevent the government from realizing losses realistically and dealing effectively with the problem.

"The longer the government waits to move on the insolvent thrifts, the higher the compounded cost to the Treasury," Ely says.

"The S&L problems have put a wrench into everyone's plans," warns Stephen Moore, economic policy analyst at the Heritage Foundation.

Another solution would allow the bail-out pain to be spread out over a four-year or five-year period, but it would risk higher long-run costs.

A third option would allow the government to take the bail-out costs off budget and create special loan guarantees for the Federal Savings and Loan Insurance Corp. (FSLIC) to close insolvent thrifts and merge other low-capitalized institutions.

A fourth possible, but politically unrealistic, solution could involve a new user-free structure for competing and quasi-government subsidized lending institutions such as the Federal National Mortgage Association. …

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