From: slagle@lmsc.lockheed.com (Mark Slagle)
Subject: Re: [misc.activism.progressive] Clinton Office Requests Comments
Reply-To: slagle@lmsc.lockheed.com
In-reply-to: bzs@world.std.com's message of Fri, 8 Jan 1993 22:52:19 GMT
Organization: You wouldn't ask this if you'd seen my desk.
	<BZS.93Jan8175219@world.std.com>
Date: 9 Jan 93 02:22:51

In article <BZS.93Jan8175219@world.std.com>, bzs@world.std.com (Barry Shein) writes:

> A minute ago you were talking about the wonders of insurance. Now you
> seem to believe insurance doesn't work. Which is it? What does FDIC
> stand for? How is it operated? Is it different than any insurance,
> other than the fact that the US Govt happens to own it? Have you ever
> spent more than 10 seconds thinking about these issues before parading
> them in public? Do you feel silly right now? You certainly should.

Perhaps if you are credulous enough to believe that FDIC is an
insurance program you also believe that FICA program is insurance
(by the way, it's the FSLIC that "insures" the S&L deposits, not
the FDIC).  Has it not occurred to you that the names that those
in government give to things do not always reflect reality?

>>the individual shares of a $5 billion bailout would have been
>>enough for everybody to insure their own investments. whoops.
>>the government won't allow competition in that area.

> It was $500B.

> It WAS insurance, what are you talking about?

It was no such thing.  If the program had been actuarially sound,
we would not be in the unpleasant position of being forced to
ante up 500 billion big ones.  It was a government guarantee
against stupidity, greed, dishonesty, and foolishness.  It was an
attempt to legislate away some of the less desirable aspects of
human nature.  Worked like a charm, wouldn't you say?

> So you just posit out of thin air that your idea is better because it
> happens to be derived not from the slightest understanding of how the
> system works but from your own personal ethical and moral system that
> eschews annoying details like how the banking system works but instead
> slaps simplistic junk-food ideas on any problem it confronts? Excuse
> me, but I am not impressed.

So ... if I understand you correctly it is your contention that
the kettle is black.  Well, perhaps so.

As for how the banking system works, it hummed along nicely for
years on the well-known 3/6/3 principle.  Through the fifties and
into the early sixties the officers of the neighborhood savings
and loan associations were able to apply this principle more or
less mindlessly and profitably.  Accept deposits at three
percent, loan the money back out in safely collateralized home
mortgages at six percent, and be on the golf course by three in
the afternoon.

So what went wrong with this cozy little scheme?  Perhaps you
were not around back then, so I will try to outline the history.
The direct causes of the S&L "crisis" go back to the sixties.
The inflationary social spending of the Kennedy administration
and, more importantly, the huge government expenditures on
Johnson's war in Vietnam were responsible for upsetting the
applecart of assumptions that were the foundation of the S&L
business.  Loaning money long term and taking deposits short term
only works if interest rates are stable over the period of the
the long term loans.  This condition was well met through the
Eisenhower years, but never thereafter.  We can, of course, let
Nixon take some of the blame for taking so long to extricate us
from the Vietnam morass, but aside from his many shortcomings,
his fiscal policies otherwise did little to exacerbate the
problem at hand.

Now, by the time the Carter administration was well along, the
situation had begun to get really nasty.  President Jimmy and the
Congress were faced with the prospect of an imminent collapse of
the S&L system and its supporting federal "insurance" scam.  They
took measures to plug the cracks in the hull of the system while
ignoring the water gushing in over the gunwales.  The whole mess
is a monument to political cowardice.  It would not have cost
nearly so much to bail out the system then, though it would
likely have been politically suicidal to do so.

What they did instead was to permit the S&L people to invest in
more risky, but higher yielding, instruments such as "junk"
bonds, an unfortunate name for a legitimate and valuable form of
investment, and commercial real estate projects.  One of the
problems with this part of the solution was that the S&L officers
were eminently unqualified by their prior experiences to properly
evaluate the investments being hawked by Wall street bond sharks
and other wheeler dealers who recognized the vastness of the
newly created market for loan money and the equally vast
ignorance of the hick town S&L bigshots.

Now, notwithstanding these facts, blaming deregulation, as some
are wont to do, for the underlying and inherent flaws in the
system is itself a smokescreen over the real cause of the
ultimate fiasco.  At the same time that Congress was
"deregulating" the S&L business, far too strong a term for the
loosening of the regulations that they actually approved, they
were also slipping a nifty little rider onto one of their bills.
Their quiet little law raised the limit on the S&L deposit
insurance from $40 thousand dollars (per depositor at a given
institution, as I recall) to $100 thousand dollars per account.
Consider the sort of "small depositor" such an increase was
designed to "protect."  Who do you suppose could possibly have
been in Washington pimping for such a bill?

But shifting the blame to the "scum" and "crooks" that eventually
ran off with most of the money is facile, but not helpful in
crafting public policy.  Certainly there were greedy people to
take advantage of this government largesse.  There always are.
What idiot would not expect that the situation would take a turn
for the worse under such carefully manipulated circumstances.  In
the guise of "protecting" the small investor, the government
shattered any incentive for depositors to spread their money
around among several different institutions, nor did they leave
any incentive for depositors to look into the quality of
management or investments of the entities that held their money.
Why should the depositors have done so?  Their funds were
guaranteed safe from fire and flood and depredation by no less
than the Federal government.  It's a peculiar sort of
deregulation that says, "Here, do what you want to run your bank,
but if you blow it, or if you are dishonest, we will cover all
the losses."

In the end, what happened here was just tax and spend politics as
usual, a non-partisan game with your money.  It was just the
bankers, the pillars of their respective communities, getting
together with their paid stooges in government and some smart
operators to figure out a way to bail out their little game gone
sour, without the necessity of sacrificing their afternoons on
the links.

And if you still think its a good idea to have the government run
any sort of program at all, like national health care or whatever
your favorite government transfer program is this month, then try
and understand what actually happens when you put a lot of other
people's money into the hands of those who didn't have to earn
it.  Just remember what good stewards of the public trust and
monies the politicians have been in the case of the S&L giveaway.
Imagine it was just an aberration instead of business as usual.
"Imagine, if you can."

=Mark
--
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Mark E. Slagle                                 PO Box 61059
slagle@lmsc.lockheed.com                       Sunnyvale, CA   94088
408-756-0895                                   USA