Ronald Reagan's America - Vol. 1

By Eric J. Schmertz; Natalie Datlof et al. | Go to book overview

9
Deregulation Gone Awry: The Savings-and-Loan Debacle

Lawrence J. White

I think that deregulation is a very important area. It's an area of a lot of misunderstandings, and the area of the savings-and-loan debacle is among the most misunderstood.

Financial historians in future decades are going to put the savings-and-loan debacle into the same category as other major financial disasters of history. They will lump it with England's South Sea bubble, with Holland's tulip mania, with America's great stock market crash of 1929, and they will be right. It has been a truly awful, tragic experience. It has cost our country approximately $200 billion dollars. It has given the cause of deregulation a bad name. And, as I said, it has been badly misunderstood. The wrong lessons have been learned from it. Yes, it was a botched experience of deregulation. But it was botched because, in the early 1980s, there were too many people in Washington in the Reagan administration, on Capitol Hill, in the Congress, in the press, in the media, and outside of Washington as well who did not understand the difference between regulating interest rates and regulating safety standards. At least they didn't understand it in the banking and savings-and-loan area. And when the cry went out to deregulate, then deregulate they did -- on both fronts.

Now, let's recall what the world of the savings-and-loan industry looked like before the 1980s. This was a quiet little industry; it hadn't caused anyone any problems since the 1930s. It was narrowly focused on taking in passbook deposits and making home mortgage loans. It was focused in this narrow way partly by choice -- that's what S & Ls are good at doing -- but also partly by very strict, constricting regulation. The industry was subject to interest-rate controls on the interest rates that it could pay to depositors; this was the infamous Regulation Q that had been imposed on the industry in 1966. And it was an industry that could not offer adjustable-rate mortgage loans -- again, because of

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