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Never Again: The Savings and Loan Bailout Bill
25 pages, Paperback
Published January 1, 1990
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July 26, 2024
A CRITICAL (CONSERVATIVE) VIEW OF THE 1989 SAVINGS AND LOAN BAILOUT
At the time this booklet was published in 1990, Kenneth E. Scott was a Senior Research Fellow at the Hoover Institution; he is also the author of 'Ending Government Bailouts as We Know Them,' 'Banking Reform: Economic Propellants, Political Impediments,' etc.
He argues that "The holder of an insured account had no reason to be concerned with the safety or soundness of the particular institution in which he had invested, or to require a higher return commensurate with higher risk... From the standpoint of the management and owners of an insured S&L, this system created a constant inducement to take added risks with their expected higher returns---depositors would not demand higher interest, and the FSLIC could not raise its premium in response." (Pg. 4)
He adds, "It became the general regulatory policy not to put an institution into receivership merely because it was insolvent in an economic sense... The reasons for this policy of nonrecognition of insolvency by the Reagan administration are not obscure... Augmenting those reserves would have required the administration to go to Congress for large appropriations, at the very time that it was seeking to put through the major tax reduction that had been the president's leading campaign commitment." (Pg. 6)
He suggests, "Economic downturns will always produce some failures, and severe conditions may produce many failures, but the huge losses experienced recently were the consequences of perverse incentives that shaped the decisions of both the management of S&Ls and banks and the management of the insurance funds. In short, the key to effective reform is to change that incentive structure for the future." (Pg. 16) He concludes that with the financial reforms of 1989, "The structural deficiencies of the S&L industry do not seem to be sufficiently appreciated, and the incentive problem at the core of effective reform has not really been perceived and forcefully addressed." (Pg. 19)
The S&L bailouts of the 1980s have often been compared to the Wall Street bailouts of 2008-2009; for that reason, this booklet is still of some current interest.
At the time this booklet was published in 1990, Kenneth E. Scott was a Senior Research Fellow at the Hoover Institution; he is also the author of 'Ending Government Bailouts as We Know Them,' 'Banking Reform: Economic Propellants, Political Impediments,' etc.
He argues that "The holder of an insured account had no reason to be concerned with the safety or soundness of the particular institution in which he had invested, or to require a higher return commensurate with higher risk... From the standpoint of the management and owners of an insured S&L, this system created a constant inducement to take added risks with their expected higher returns---depositors would not demand higher interest, and the FSLIC could not raise its premium in response." (Pg. 4)
He adds, "It became the general regulatory policy not to put an institution into receivership merely because it was insolvent in an economic sense... The reasons for this policy of nonrecognition of insolvency by the Reagan administration are not obscure... Augmenting those reserves would have required the administration to go to Congress for large appropriations, at the very time that it was seeking to put through the major tax reduction that had been the president's leading campaign commitment." (Pg. 6)
He suggests, "Economic downturns will always produce some failures, and severe conditions may produce many failures, but the huge losses experienced recently were the consequences of perverse incentives that shaped the decisions of both the management of S&Ls and banks and the management of the insurance funds. In short, the key to effective reform is to change that incentive structure for the future." (Pg. 16) He concludes that with the financial reforms of 1989, "The structural deficiencies of the S&L industry do not seem to be sufficiently appreciated, and the incentive problem at the core of effective reform has not really been perceived and forcefully addressed." (Pg. 19)
The S&L bailouts of the 1980s have often been compared to the Wall Street bailouts of 2008-2009; for that reason, this booklet is still of some current interest.
Displaying 1 of 1 review