The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation

By Lawrence J. White | Go to book overview

CHAPTER ONE
Introduction

The S&L debacle -- the massive insolvencies of hundreds of savings and loan associations -- has been a traumatic event for the worlds of finance and government in the United States. The costs of dealing with this mess -- of honoring the government's deposit insurance obligations -- will be huge and seem to be ever rising. Revelations of new financial abuses or political intrigues related to the debacle are almost a daily staple of the media.

This book is about that debacle. 1 It offers a perspective on these large-scale insolvencies and their huge costs: what happened, how it happened, why it happened -- and what must be done to ensure that it never happens again. It is a book about fundamental economic forces and incentives and about government policies that went awry and that, in different ways, continue to go awry. The public policy lessons that need to be learned from this debacle are broad and go far beyond regulation and deposit insurance for the thrift industry alone. They apply with equal validity to the regulation of and deposit insurance for the much larger world of commercial banking. They also have value for the reform of bank regulation in other countries, who can learn from the sorry and extremely costly mistakes of the U.S. government.

The fields of bank and thrift regulation and the operations of their deposit insurance systems are arcane and are usually of little interest to anyone outside of those areas. An understanding of these processes, however, is crucial to comprehending what went wrong, why the thrift deposit insurance arrangement went so badly astray, and why a major overhaul of our regulation and deposit insurance systems is so vital. This book will attempt to provide that understanding.

A number of themes will surface throughout this book. First, the bank and thrift regulatory (and deposit insurance) regimes of the United States are based on a fundamentally flawed information system. That information system -- the standard accounting framework used by bank and thrifts -- looks backward at historical costs rather

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