From: crosmun@mickey.rtp.dg.com (William Crosmun)
Subject: Re: Incompetent S&L deregulation
Date: Tue, 28 Jul 92 16:50:58 GMT
Organization: Data General Corporation, RTP, NC.

In article <nate.383@psygate.psych.indiana.edu> nate@psygate.psych.indiana.edu (Nathan Engle) writes:
>szabo@techbook.com (Nick Szabo) writes:
>>nate@psygate.psych.indiana.edu (Nathan Engle) writes:
>>>...I hope we would agree that 
>>>the deregulation of the S&L's was not one of Reagon's most successful
>>>policies?
>
>>Agreed. The problem was that Reagan took away the regulations without taking
>>away the insurance subsidies.  It was still possible for a wealthy
>>depositor to put $1 million in 10 different accounts, the S&Ls to turn 
>>it into $50 million in risky mortgages, and they whole deal to be backed 
>>100% by our tax dollars.
>
>    So, do you think that everything would be just rosy today if the S&L's
>had been deregulated without any deposit insurance so that when the crash 
>occurred the depositors would have been the ones who took it on the chin?
>IMHO, the big mistake was the deregulation, not the subsequent attempts to 
>help the depositors. Once it became obvious that the deregulated S&L's 
>were failing I think it would have been disastrous to our entire economy 
>if their plight was ignored. What happened when banks failed in the late 
>1920's? All the sudden people didn't have money to spend and the consumer
>economy collapsed.

The S&L's weren't deregulated in a vacuum.  During the '70s, when the S&Ls
were restricted by regulation to paying 5 1/4% interest on savings accounts
while money market funds were paying 10-12% and more, money was leaving the
S&Ls by the billions.  At the same time they had long term loans outstanding
at 4-7%.  The result: the entire industry was facing bankruptcy if the
regulations were not changed.  First, they had to be able to offer more
attractive interest rates than the money market funds.  This would bring the 
money back.  Second, they had to be able to make riskier loans in order to be
able to pay the higher interest rates.  So, unless we were willing to see the
S&Ls go out of business, deregulation was inevitable.  

Given this, the Federal guarantee, if not eliminated, should have been 
drastically reduced.  Let those who can afford to put 100,000 dollars into a 
savings account be aware of the risk they are running.  Reducing the guarantee
to 10,000 would have covered the vast majority of us (I believe the median 
balance is around 5,000), and limited our exposure as taxpayers to the crazy 
lending practices sponsored by the "too big to fail" policy and the 100,000 
guarantee.

>
>--
>Nathan Engle                        Software Juggler
>Psychology Department               Indiana University
>nate@psygate.psych.indiana.edu      nengle@copper.ucs.indiana.edu


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William Crosmun
crosmun@dg-rtp.dg.com

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It can't be won, the way the game is run
but if you choose to stay, you wind up playing anyway.

		"On the Boulevard" -- Jackson Browne

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"As to guaranteeing bank deposits, the minute the government starts to do that
... the  government  runs  into a  probable loss.  We  do not wish to make the 
United  States Government liable  for the  mistakes and  errors of  individual
banks, and put a premium on sound banking in the future."
                                      Franklin D. Roosevelt (1933)
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