Talk:Savings and Loan Crisis

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Contents 1 Savings and Loan crisis 2 Causes of the Crisis 3 Details of the response 4 Sentence removed from info 5 Banc 6 Slight Bias? 7 an extremely flawed monetary policy 8 The Savings and Loan Crisis 9 Someone asks, And just out of curiosity, exactly who "created" this extremely flawed monetary policy? 10 I think this article should be moved 11 Criticism of this article 12 One "Causes" section

[edit] Savings and Loan crisis

From a systems viewpoint, commercial banks as contrasted to financial intermediaries (S&Ls, MSBs, CUs), never loan out existing deposits (saved or otherwise) including existing DDs, or TDs or the owner’s equity or any liability item. When CBs grant loans to or purchase securities from the non-bank public (which includes every institution and every person except the commercial and the reserve banks), they acquire title to earning assets by the creation of NEW money-DDs.

The lending capacity of the member CBs of the Federal Reserve System is limited by the volume of free legal reserves put at their disposal by the Federal Reserve Banks in conjunction with the reserve ratios applicable to their deposit liabilities (DDs, TDS, &Euro-dollar borrowings), as fixed by the Board of Governors of the Federal Reserve System.

The high degree of liquidity and shift ability which the Reserve Banks and numerous other federal financial institutions provide the CBs, make it possible to treat free bank reserves purely as a credit-control device rather than as reserves in the traditional sense, as assets that can be utilized to meet emergency cash demands on the banks.

Since 1942, money creation is a system process. No bank, or minority group of banks (from an asset standpoint), can expand credit (create money), significantly faster than the majority banks expand.

From the standpoint of the individual commercial banker, his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its free legal reserves – and thereby it’s lending capacity. But all such inflows involve a decrease in the lending capacity of other commercial banks (outflow of cash and due from bank items), unless the inflow results from a return flow of currency held by the non-bank public, or is a consequence of an expansion of Reserve Bank credit. Hence, all CB liabilities are derivative.

That is, CB time/savings deposits, unlike savings accounts in the “thrifts”, bear a one-to-one relationship to demand deposits. As TDs grow, DDs shrink pari passu, and vice versa. The fact that currency may supply an intermediary step (i.e., DDs to currency to TDs, and vice versa) does not invalidate the above statement. For example, it was not by happenstance that the $27 billion decline of DDs from Nov. 1980 to May, 1981 is almost exactly matched by the growth of CB ATS accounts and negotiable CDs. If the member CBs were operating with an excess volume of free legal reserves, then it could be said that the volume of bankable investments was inadequate, and that the intermediaries were acquiring investments or loans the CBs would otherwise hold. But the member CBs had no excess legal lending capacity, and the non-member CBs were presumably operating at their economic limits. In other words, monetary savings are never transferred to the intermediaries; rather monetary savings are always transferred through the intermediaries.

Indeed as evidenced by the existence of “float”, reserve credits tend, on the average, to precede reserve debits. Therefore, it is a delusion to assume that savings can be “attracted” from the intermediaries, for the funds never leave the commercial banking system. Consequently, the effect of allowing CBs to “compete” with MMFs and other intermediaries has been, and will be, to reduce the size of the intermediaries (as deregulation of S&L’s did in the 80’s) – reduce the supply of loan-funds (available savings), increases the proportion, and the total costs of CB TDs.

Contrary to the DIDMCA underpinnings, member commercial bank disintermediation is not, and has not been, predicted on interest rate ceilings. Disintermediation for the CBs can only exist in a situation in which there is both a massive loss of faith in the credit of the banks and an inability on the part of the Federal Reserve to prevent bank credit contraction, as a consequence of currency withdrawals. The last period of disintermediation for the CBs occurred during the Great Depression, which had its most force in March 1933. Ever since 1933, the Federal Reserve has had the capacity to take unified action, through its "open market power", to prevent any outflow of currency from the banking system.

The public, seeking to cash their deposits, would soon have a surfeit of paper money. A general run on the banks is impossibility. Where the Federal Deposit Insurance Corporation cannot handle the situation (Continental Illinois, for example), the Fed will guarantee the liquidity of the bank’s deposits. In other words, a liquidity crisis leading to the wholesale failure of commercial banks is impossible. Where banks are allowed to fail, or are absorbed into solvent banks, customers never suffer losses if their deposit does not exceed $100,000. The fed intervened in the Continental case because many corporations, foreign and domestic, had deposits far in excess of $100,000

However, disintermediation for financial intermediaries-S&Ls, MSBs, CUs, etc., is predicated on their loan inventory (and thus can be induced by the rates paid by the commercial banks); earning assets with historically lower rate and longer term structures. In other words competition among commercial banks for TDs has: 1) increased the costs and diminished the profits of commercial banks; 2) induced disintermediation among the "thrifts" with devastating effects on housing and other areas of the economy; and 3) forced individual bankers to pay higher and higher rates to acquire, or hold, funds.

Savers (contrary to the premise underlying the DIDMCA in which CBs are assumed to be intermediaries and in competition with thrifts) never transfer their savings out of the banking system (unless they are hording currency). This applies to all investments made directly or indirectly through intermediaries. Shifts from TDs to DDS within the CBs and the transfer of the ownership of these DDS to the thrifts involves a shift in the form of bank liabilities (from TD to DD) and a shift in the ownership of DDs (from savers to thrifts, et al). The utilization of these DDs by the thrifts has no effect on the volume of DDs held by the CBs or the volume of their earnings assets. In the context of their lending operations it is only possible to reduce bank assets and DDs by retiring bank-held loans, e.g., the only way to reduce the volume of demand deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.

The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can make loans (if monetary policy permits and the opportunity is present) which amount to server times the initial excess reserves held. Financial intermediaries lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the CBs lend no existing deposits or savings; they always, as noted, create new money in the lending process. Saved DDs that are transferred to the S&Ls, etc., are not transferred out of the CBs; only their ownership is transferred. The reverse process, which is called “disintermediation”, has the opposite effect: the intermediaries shrink in size, but the size of the CBs remains the same.

Beginning in the late 1950’s, the commercial bankers made a determined effort to get a “bigger piece of the action” in the home loan business. It unfortunately coincided with the influx of Keynesian economists into high positions in the government as well as in the universities. The Keynesians made no distinction between credit (money) creating institutions and financial intermediaries (loan-funds). Individual bankers are entitled to subscribe to such ignorance, since their experience is that of an intermediary. Economists should know how the system operates.

Professional economists have no excuse for misinterpreting the savings investment process. They are paid to understand and interpret what is happening in the whole economy at any one time. For the commercial banking system, this requires constructing a balance sheet for the System, an income and expense statement for the System, and a simultaneous analysis of the flow of funds in the entire economy. From a System standpoint, time deposits represent savings have a velocity of zero. As long as savings are held in the commercial banking system, they are lost to investment. The savings held in the commercial banks, whether in the form of time or demand deposits, can only be spent by their owners; they are not, and cannot, be spent by the banks.

In the General Theory, John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.” In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. Perhaps this is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, etc.

From a system standpoint TDs constitute an alteration of bank liabilities, their growth does not per se add to the “footings” of the consolidated balance sheet for the system. They obviously therefore are not a source of loan-funds for the banking system as a whole, and indeed their growth has no effect on the size or gross earnings of the banking system, except as their growth affects are transmitted through monetary policy.

Lending by intermediaries is not accompanied by an increase in the volume, but is associated with an increase in the velocity of money. Here investment equals savings (and velocity is evidence of the investment process), where in the case of the CB credit, investment does not equal savings but is associated with an enlargement and turnover of new money. The difference is the volume of savings held in the commercial banking system is idle, and lost to investment as long as it is held within the commercial banking system. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have recessionary effects in our highly interdependent pecuniary economy. (Stagflation was the inevitable outcome of increases in REG Q ceilings since 1965).

With this rationale, the banker’s were accommodated by our legislators (the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services, U.S. House of Representatives & the Committee on Banking, Housing, and Urban Affairs, U.S. Senate) when they wanted interest ceilings (Regulation Q) raised and when they desired lower reserve ratios (in spite of the Board of Governors independence).

In the early sixties, the bankers at Citicorp invented the negotiable CD. It proved highly successful – at least from the standpoint of Citicorp. The cost of acquiring funds was less than the net returns on the additional earnings assets Citicorp was able to acquire. But Citicorp’s profits were at the expense of other banks since all the funds that Citicorp acquired by this method came from other commercial banks. This institutional innovation allows all of us, from the Treasurers of the largest corporations to the smallest savers, to hold any temporary surplus cash in an interest bearing account which can be shifted at little or no cost, and no loss of accumulated income, into DDs or currency.

Years later, the bankers at Citicorp originated the LDC loan. In May of 1987, Citicorp was obligated to add 3 billion, 25%, to its loan-loss reserves, because of non-performing foreign loans. The severe penalty attached to holding idle cash balances puts pressure on loan officers to seek higher and higher rates. Not only are marginal loans acquired by this process, but also many otherwise good loans become marginal at these lofty rates. Default is the inevitable consequence. Add to the above the erroneous Keynesian concept that the volume of money could be controlled through the manipulation of the federal funds rate. The vast and inflationary expansion of the money supply and the transactions velocity was inevitable.

The liquidity problems of the S&Ls has been especially acute largely because of sharply rising interest rates in the 70's and early 80's combined with their longtime competitive need to "borrow short and lend long". This, in turn, led may S&L managements to accept "brokered" loans. Further compounding the problem was the action of Congress and State legislators, under the rubric of competition, allowing S&Ls to engage in almost any type of lending, from direct developer financing to the right to purchase "junk" bonds. Unfortunately many S&L managements, responding to apparent economic necessity, or because of greed and/or incompetence, engaged in reckless financial practices.

The maximum government guarantee on a single account is legally $100,000, but due to the widespread practice, especially in dealing with the larger institutions, of substituting assumption for liquidation, the guarantee is actually without limits. Accompanying these open-ended guarantees, managements have been given more and more freedom, or license, to compete. Little wonder that many managers abuse these discretionary powers to enrich themselves and their collaborators. After all, other institutions and ultimately the federal government (the taxpayer) acting through the FSLIC, etc., would “pick up the tab”.

Because of the resultant regulatory environment, financial intermediaries were not able to compete, prior to, or since, the DIDMCA, even in the absence of interest rate ceilings for the thrifts, (see Jan-Jul 1966 period, REG Q was raised from 4.5 to 5.5 percent) whenever the majority of CBs chose to pay higher rates. Note the Board raised CB REG Q ceilings to “bail out” certain large New York City banks. Their CDs has the instrumentality and marketability and liquidity qualities of Treasury bills. Its use enabled these large banks to draw funds out of other banks all over the country and indeed the world. By late 1965 market interest rates had risen to levels that no longer made 4.5 percent CD’s attractive. Consequently as they matured they could not be replaced, the issuing banks had large outflows of funds and faced a liquidity crisis.

The Board should have insisted from the beginning that large banks as well as small banks follow the old fashioned practice of storing their liquidity. They should not have been permitted to attempt to buy their liquidity through an open market instrument. Essentially the negotiable CD is a device for buying liquidity. But it obviously cannot fulfill this function if the issuing banks do not have the option of raising the rates they pay to meet any market conditions that may prevail.

The ballooning flow of money in the economy gave us double digit inflation and double digit interest rates. Disintermediation of the thrifts began in the 1960’s and accelerated after that. It is interesting that we apply the concept of disintermediation to thrifts but not to the commercial banks. It is proper, however, because withdrawal of funds from thrifts reduces their size. Transferring deposits from the commercial banks to the thrifts simply results in a shift of ownership of demand deposits in the commercial banks. I.e., the thrifts are customers of the commercial banks.

Furthermore, the thrifts were especially vulnerable because they were forced by competitive conditions and the nature of their business to borrow short and lend long. This unnecessary and unequal competition of the thrifts with the commercial banks resulted in a deterioration of the credit worthiness of the thrifts. The response of the monetary authorities and state legislatures was to give the thrifts more and more discretion in lending.

Unfortunately, state-chartered thrifts had the same access to FSLIC guaranteed deposits as the most rigidly controlled federal thrifts. In October, 1979, Paul Volker had the manager of the open market account largely eliminate the pegging of the federal funds rate, but most of the damage had already been done. There was enough money in the economy and rate of flow sufficient to finance the real estate inflation throughout the country. In due course, the inevitable collapse followed.

As S&L managers were allowed to become real estate developers with many opportunities for self-dealing, it came as no surprise that greed and fraud reached monumental levels in the thrift industry. The Keating five political scandal, "implicated 5 U.S. senators influencing and peddling a scheme to assist Keating. Three of those senators — Alan Cranston, Don Riegle, and Dennis DeConcini — found their political careers cut short as a result".

The depth of the financial fiasco is revealed by the rescue of the thrift industry. The FSLIC became controlled by the FDIC, and the Federal Home Loan Bank Board was absorbed into the U.S. Treasury. There was a wave of savings and loan association failures (1043) in the United States. The cost of the bailout of the Federal Savings and Loan Insurance Corporation (FSLIC) was $519 billion or more. of which $125 billion was borne by the taxpayer. This contributed to the large budget deficits of the early 1990s.

The Resolution Trust Company was created in 1989, underwritten by the taxpayer, which issued billions in bonds to finance the liquidation or the corporation will transfer the ailing thrifts to solvent institutions. As receiver, it sold assets of failed S&Ls and paid insured depositors. The Financial Institutions Reform Recovery and Enforcement Act of 1989 edict (FIRREA) is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s. It established the Resolution Trust Corporation (RTC) to close hundreds of insolvent thrifts and provided funds pay out insurance to their depositors. It moved thrift regulatory authority from the Federal Home Loan Bank Board to the Office of Thrift Supervision (OTS) (within the United States Department of the Treasury) to regulate thrifts. In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation.

In retrospect, the banks as well as the thrifts should have been subject to more intense, not less, regulation. In re-organizing our financial institutions the first requirement is to recognize that the competitive freedoms of the mercantile marketplace cannot be applied to the institutions that create our money, or protect our savings. More that 75 years ago this wisdom was recognized by the inauguration of the FDIC, the FSLIC, and many other changes in our banking structure. Deregulating financial institutions to the extent that the thrifts have been deregulated, combined with the governments’ guarantee of the liabilities of these institutions, was an invitation to financial disaster. In 1995 its duties, including insurance of deposits in thrift institutions, were transferred to the Savings Association Insurance Fund.

Why did a system that operated so successfully for almost four decades under the aegis of the FSLIC slide into the present financial quagmire? The story, of course, involves various villains, but fraud and excessive greed are not unique to the S&L industry. The basic flaw has been institutional, resulting from a pervasive misconception of the fundamental differences between the commercial banks, the money creating institutions, compared to the S&Ls which are intermediaries in the savings-investment process. Given the unnecessary and unreal competitive situation arising from these misconceptions, even otherwise qualified S&L administrators proved to be inadequate.

To the individual commercial banker, S&Ls were obviously competitors. Funds transferred from his bank to an S&L usually resulted in a loss of deposits, and often the opportunity to make a bankable loan. Bankers, Congress, and most of the banking authorities have simply not been able to think and to fashion our financial institutions in a systems context. From a system standpoint the S&Ls and the commercial banks are not competitive, but have a relationship that can be mutually beneficial to the economy.

It is obvious that demand deposits, which have been saved, cannot be beneficial to the economy unless they are invested. As long as savings are held in the commercial banks in the form of demand or time deposits, these deposits are not financing investment, or indeed anything; their transactions velocity is zero. If, on the other hand, these deposits are transferred through the S&Ls, or any other financial intermediary, they are invested or otherwise put to work. Such use of deposits does not change the volume of deposits in the commercial banks, merely their ownership.

The activation of these deposits increases employment, the demand for varieties of goods and services – and the opportunities of the commercial bankers to make bankable loans. The “loan pie” is not a fixed entity; it grows when the economy grows.

The commercial banks do not, and cannot, loan out existing deposits, demand or time. The commercial banks, in dealing with the nonblank public, including the U.S. government, create new demand deposits in exchange for the earning assets which they acquire. All time deposits are derived from demand deposits.

The commercial banks can force a contraction in the size of the S&L system, and created liquidity problems in the process, by outbidding the S&Ls for the public’s savings. This process is called “disintermediation”, and economist’s word for going broke. The reverse of this operation, as implied in the analysis above, cannot exist. Transferring saved demand or time deposits through the S&Ls cannot reduce the size of the commercial banking system. Deposits are simply transferred from the saver to the S&L to the borrower, etc.

The drive by the commercial bankers to expand their savings accounts has a totally irrational motivation, since it has meant, from a systems standpoint, competing for the opportunity to pay higher and higher interest rates on deposits that already exist in the commercial banking system. But it does profit a particular bank, Citicorp, to pioneer the introduction of a new financial instrument such as the negotiable CD until their competitors catch up; and then all are losers. The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the banking system. This is not a zero sum game. One bank’s gain is less than the losses sustained by other banks.

This fundamental misconception of the role of the commercial backs vis’vis the S&Ls in the savings-investment process did not create financially lethal problems for the S&Ls as long as the commercial banks did not, or could not due to the interest rate ceilings, pursue and aggressive policy to expand their time deposits.

As late as 1956, member banks were paying an average rate of only 1.5 percent on their time deposits. The fed capped the interest rate member banks could pay through its Regulation Q, and the FDIC followed the practice of applying the same rate structure to all insured nonmember banks. As a consequence of the unprecedented housing boom following WWII the S&Ls prospered and grew; and at a much faster rate than the commercial banks. This intensified the desires of the commercial bankers to “get a piece of the action”.

Because of the Fed’s pegging policy on the federal funds rate, bankers knew that to obtain additional legal reserves and lending capacity, they could go into the federal funds market, bid up the rate, and the Fed would respond with net open market operations. This they did, all the while agitating for higher and higher interest rate ceilings; and the Fed, and consequently the FDIC, accommodated them. Thus was more and more debt monetized, and the inflationary consequences pushed inflation and interest rates to double digit levels.

Further evidence that the Fed has based its policies on the incorrect assumption (that in their time deposit activities the commercial banks act as intermediaries in the savings-investment process), is the virtual elimination of all interest ceilings and reserve requirements on time deposits. Further compounding these errors, the Fed, the Comptroller of the Currency, and State agencies have allowed the introduction of negotiable CDs, ATS, NOW accounts and finally those interest bearing demand accounts called Money Market Deposit Accounts. The development of ATS accounts, Super Now accounts, and MMDA’s coincided with the passage of the DIDMCA.

With the enactment of the Garn-St. Germain Depository Institutions Act of 1982, banks were no longer constrained by interest rate ceilings, the banks extended credit with essentially no restraints. Note: the DIDMCA created the legal framework for the addition of 38,000 commercial banks to the 14,000 we already had. Lending by the thrifts is not inflationary. Lending by the CBs is inflationary. Note: the DIDMCA was a replay of 1966; just wider in scope.

The cumulative effect has been to transform virtually all time deposits into the economic equivalent of demand deposits, since the holders of these accounts can on demand, or in the marketplace, convert these holdings without significant delay into demand deposits. As a consequence, the transactions velocity of demand deposits has vaulted.

What should be done? As a long-term proposition, gradually lower REG Q ceilings until the commercial banks are out of the savings business. Then we could remove all other interest ceilings. What would all of this do? The commercial banks would be more profitable - if that is desirable. Why? because the source of all time deposits is demand deposits directly via the currency route or through the commercial banks undivided profits account. Money flowing "to" the intermediaries actually never leaves the commercial banking system as anybody who has applied double-entry book-keeping on a national scale should know. The growth of the intermediaries cannot be at the expense of the commercial banks. And why should the banks pay for something they already have? I.e., interest on time deposits

The S&Ls, which for competitive reason had to borrow short and lend long, obviously had to endure heavy losses. Unfavorable interest rate differentials were the principal risk of the S&Ls, while loan delinquency was much less a problem for the S&Ls as compared to the commercial banks Both institutions have suffered the consequences of gross mismanagement of our money, much of which was the consequence of pressures initiated by the commercial bank and S&L interests.

Our money and savings require a special fiduciary relationship on the part of commercial banks, the S&Ls, and all other involved institutions. It cannot be fostered by deregulation. The scope of the operations of these institutions must be severely circumscribed and subject to rigorous and informed supervision.

The deterioration of our financial infrastructure has many causes; the chronic mismanagement of our money system since the early 60s; the confusion of economic competition with financial permissiveness; the blurring (by law and administrative practices) of the important distinction between money creating institutions and financial intermediaries; and a seeming unwillingness of the monetary authorities, especially in the Federal Home Loan Bank Board and the FSLIC, top adequately monitor the S&Ls and take appropriate action to prosecute obvious fraudulent management practices especially in many of the large S&Ls in Texas and California. It is estimated that at least 70- percent of the losses to the FSLIC were concentrated in these two states; 50 percent in Texas alone. Even most of the special problem commercial banks under the jurisdiction of the FDIC were located in Texas. In Jan 1987, the government accounting office announced that the FSLIC was insolvent. In a risk less lending environment, (that is one in which there is no credit or inflation risk) long-term rates tend to fluctuate in a 2 to 4 percent range and short rates (e.g. Treasury bills) around one percent.

For many years, before and during WWII, the Post Office paid savers a two percent rate, (the U.S. Post Office once conducted a savings account business),m and the federal government financed its debt with Treasury bills yielding less than 1 percent and long-term bonds yielding around 2-2 ½ percent.

When the federal funds rate reached a level of nearly 18 percent in 1981 there was obviously a high rate of inflation. Both Treasury bills and long-term U.S. government bonds reached their peak yields of approximately 15 percent in the same period, reflecting both a high rate of inflation and, for the bonds, a high expected rate of inflation and risk.

Between 1967 and the end or 1982 the CPI rose approximately 200 percent or at an average annual rate, in terms of base year prices, of more than 13 percent. Interest rates of course reflect current, not average, rates of inflation. The latter were in the 9 – 12 percent range in the 1979 – 1982 period. Interest rates also reflect the rates and expected rates of real property inflation. Inflation in land, buildings, and resources was usually far in excess of the CPI numbers. That largely explains why in 1981 the prime rate of major banks exceeded 20 percent.

The universal problem encountered by the S&Ls has been adverse interest rate differentials, the difference the S&Ls paid to attract and hold savings, and the return on long-term mortgage commitments made at an earlier and lower rate periods. During the late 70s and early 80s this adverse differential often amounted to more than four percentage points. Even for the most efficient S&Ls a positive spread of at least two percentage points was required to break even. Thus, the annual losses amounted to approximately 6 percent of loans outstanding.

Although the weakened condition of the S&Ls was unnecessarily exacerbated by commercial bank practices relative to their time deposits, the principal cause of their losses derived from the interest rate response to the high and accelerating rates of inflation that prevailed in the late 70s and early 80s. These devastating rates of inflation were the consequence of excessive monetary flows in the economy which, in turn, was the consequence of an extremely flawed monetary policy.

And just out of curiosity, exactly who "created" this extremely flawed monetary policy?83.108.248.76 01:42, 11 April 2007 (UTC)

For the first 3 years of the Great Depression (September, 1929-June, 1932) Dr. Leland James Pritchard taught political economy courses in the Syracuse University Maxwell School of Public Administration, and earned masters in statistics. In the fall of 1932 he enrolled the Graduate School of Economics of the University of Chicago, He shared classes in business cycles, money and banking, monetary theory, and assorted theory courses with classmate - Milton Friedman. He read Keynes' two volume "A Treatise on Money", and all the available books on the Federal Reserve System, etc. He received his Ph.D. in economics and was elected Phi Beta Kappa. He served with the Federal Emergency Relief Administration, The Works Projects Administration, and The War Labor Board. Professor Pritchard has served both as Dean of the School of Business and as Chairman of the Economics Department at the University of Kansas. In 1962-1963, he was a Fulbright Lecturer in Ankara, Turkey. He was President (1963-1964) of the Midwest Economics Association. His extensive research and publication record display a broad knowledge of both Finance and Economic Statistics. His Money and Banking Texts (1958, 1964) were widely used and are perhaps the most literate of all recent American texts in economics. He left the Leland Pritchard economic scholarship for economic students. As he preached, the only thing he bought “on-time” in his life was his house. He owned a credit union in Grand Lake Colorado, He died a multimillionare.

Flow5 03:12, 31 January 2007 (UTC)

[edit] Causes of the Crisis

My first post (still learning about Wikipedia stuff)

I've started and sold several dozen banks & thrifts, and, as an investment banker during the S&L crisis period, saw many, many failures. The "Nature of Deregulation" section is very lopsided -- Deposit Brokerage, was, and is today, an important funding tool for financial intermediaries. As I see it, the prime factors of the Thrift crisis were:

- Lack of profit motive -- Prior to the crisis, most thrifts were mutuals, and technically owned by depositors. Without profit motive, the quality of management suffered. Management often answered to a Board of Directors heavily weighed toward closing attorneys and developers. In other words, no shareholders, no demands for financial performance from, or improving quality of management.

- Very poor regulatory environment - Thrifts were allow to pay as much as 1/4 percentage point more to attract depositors. They could also operate with 1/2 as much capital, and were required to invest deposits in relatively risky investments: real estate. Frankly, a sure formula for failure in time of high inflation.

Banks and Thrifts operate under a dual chartering system: State and National. Again, a key difference was the QUALITY of regulation. While Banking regulators were charged with protecting Safety and Soundness, many of the Thrift regulators were charged with promoting the Housing

John Bob 23:13, 8 December 2005 (UTC)

[edit] Details of the response

These corrections were suggested to me and I thought it would make sense to add them directly to discussion:

leaves out that: (a) the government did not bail out the S&Ls — it closed the S&Ls and bailed out depositors up to the $100k insurance limit, (b) loans could be highly “profitable” for an S&L short-term even if they were certain never to be repaid, and so could allow the owners of the S&L to pay themselves enough in dividends to get rich even though they were dooming the S&L as a company to eventual failure, and (c) if the owners were real crooks they’d have the S&L loan money to companies they controlled, with no intention of paying it back. To understand this you must realize that you could buy an S&L with $100 million in lending power for, say, $6 million, loan money from it to whatever businesses you pleased (including your own, and even even phony ones), get back the $6 million purchase cost by creating phony profits (loan the borrowers enough to pay ultrahigh interest in the first year), dump the mess in the taxpayers lap and walk away rich. -- M0llusk 06:16, 7 April 2006 (UTC)

[edit] Sentence removed from info

The sentence in the intro about the crisis being caused by "lack of regulation" is pov and unverified, thus I removed it. That opinion, as well as differing opinions on the matter, should be properly incorporated into the article. Paul 04:02, 9 April 2006 (UTC)

[edit] Banc

Didn't the term "banc" arise because the S&Ls could not legally call themselves "banks?" The banc page gives a different explanation. -- Gyrofrog (talk) 13:52, 30 June 2006 (UTC)

The banc page explanation is correct - banks which have subsidiaries that engage in businesses other than banking but wish to retain the brand name of their parent institutions will use the "banc" moniker. S&L's would use other rubrics, such as "Trust", "Thrift", or "Saving Society". Ellsworth 19:30, 13 April 2007 (UTC)

[edit] Slight Bias?

Change wording of final paragraph on Senators McCain and Glenn, slightly biased, leaves reader thinking they got away with it, when in linked articles both are exonerated of all charges --SeanWDP

[edit] an extremely flawed monetary policy

Although the weakened condition of the S&Ls was unnecessarily exacerbated by commercial bank practices relative to their time deposits, the principal cause of their losses derived from the interest rate response to the high and accelerating rates of inflation that prevailed in the late 70s and early 80s. These devastating rates of inflation were the consequence of excessive monetary flows in the economy which, in turn, was the consequence of an extremely flawed monetary policy.(quote from Flow5's post)

And just out of curiosity, exactly who "created" this extremely flawed monetary policy? --83.108.248.76 01:44, 11 April 2007 (UTC)

[edit] The Savings and Loan Crisis

One hardly knows where to begin. The entire existing section on the so-called savings and loan crisis is so wildly fictional that to correct the errors would be to throw out everything that now appears and to start afresh. The statements that I read, in simply skipping through the so-called explanations, ignored so many essential truths, like the fact that (1)the FDIC had no relationship to the savings and loan business, (2) in the states where the savings and loans were most hard-hit by the failure of loans--Texas, Oklahoma, Louisiana, Colorado, and other states in the oil producing region--there were more commercial bank failures, by a considerable number, than there were savings and loan failures (3) that the regulators were so high-handed in their forced closing of solvent savings and loan associations that the U.S. courts ordered the federal government to go back and reimburse the stockholders of some 200 associations an amount in the neighborhood of $20 billion for having wrongly taken over the institutions (4) that, at the same time the S&L were being pilloried, the outstanding loans of major commercial banks to "emerging nations" were so much greater than the reserves of those banks that the federal regulators had to enter into a subterfuge with the banks that allowed them to lend additional funds to their bankrupt borrower-nations so those nations could pay the overdue interest on the loans. (It kept the banks from having to take billions of dollars in writeoffs, which would have caused them to fail, but simply extended the outstanding debt of the emerging nations--debt that they already could not pay. This only scratches the surface. I strongly urge anyone with a sincere interest in this issue to look further for a credible explanation.

68.0.112.11 22:27, 23 June 2007 (UTC)William Waller

[edit] Someone asks, And just out of curiosity, exactly who "created" this extremely flawed monetary policy?

Nelson Aldrich, J.P. Morgan, Frank A. Vanderlip, and Paul Warburg were the principle architects, but it has been tweaked many times over the decades.

[edit] I think this article should be moved

According to the Wikipedia Manual of Style, article titles should follow this rule: Only the first letter of the first word, letters in acronyms, and the first letter of proper nouns are capitalized; all other letters are in lower case. Based on that, shouldn't the article be moved from Savings and Loan Crisis to Savings and Loan crisis? Anyone disagree? - Walkiped ^{(T | C)} 18:16, 1 December 2007 (UTC)

[edit] Criticism of this article

Take a look here - praise given and fault found by Mish's Global Economic Trend Analysis: [1] Shtove (talk) 12:14, 10 January 2008 (UTC)

[edit] One "Causes" section

The article needs one section on “Causes”. I moved the two sections related to causes together. Also want to make sure the fact that the list of 15 causes was developed by United States League of Savings Institutions is noted in the section. There is also lot of information about the causes under the “Failures” section. —Preceding unsigned comment added by Halgin (talk • contribs) 02:32, 21 January 2008 (UTC)