Debt Consolidation

A Quick Summary of the S & L Crisis

Posted on: June 04, 2008
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The Savings and Loan crisis story is a two part story. The first part involves the events that caused the S&L problem. These are the events frequently mentioned in new that politicians will talk about. The rest of the story involves the series of events that turned the problem into a major crisis and started costing you money. Folks in Washington (and a few other places) would prefer that you didn't look too closely at this.

The initial trigger of the S&L crisis was the inflation of the late '70's. During this time, inflation reached such high levels that many Savings and Loan Institutions (which depended on residential mortgages for income) were losing money on fixed-rate loans. These fixed-rate loans had been set up in previous years, and interest rates were set well under the rate of inflation. By doing this the S&Ls were paying their customers to borrow money. To prevent the S&Ls from collapsing, Congress allowed them to diversify into riskier and more profitable commercial real estate and lending requirements were loosened. This is was the start of the crisis.

This change in the law loosened restrictions and accounts for about $50 Billion of the Savings and Loan bill. Because of this anyone who says that the S&L crisis was due solely to economic factors might be trying to hide something.

The S&L crisis was caused by economic factors but was greatly exacerbated by five specific policy decisions:

  • Lending requirements were loosened as described above.
  • Deposit Insurance was raised from $40,000 to $100,000.
  • Enforcement of the law by banking regulators was decreased.
  • Politicians actively interfered in investigations of failing thrifts on behalf of specific S&L owners .
  • Implementation of the solution was delayed until the industry itself couldn't possibly pay for it and taxpayers were stuck with the bill.

The first policy change was a questionable decision made for good reasons. The other four decisions were made at the request of S&L lobbyists which was paid for with campaign contributions and loans to elected officials . Thus a $50 billion economic problem was turned into a $400 billion corruption problem.

The sad thing is that most people still do not understand how they were robbed. Because this was a bipartisan robbery, both parties have cooperated in keeping this as quiet as possible and perpetuating the myth that it was due entirely to economic factors. They want you to pay up your $3000 S&L bill and forget about it.

If anyone wants to understand where their money went, I would recommend reading Inside Job by Steven Pizzo. It is a good read that will help you understand the S&L crisis and give you an insight into the HUD scandal, Whitewater, and politics in general. It should be required reading in all civics classes.