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The S&L Bailout: Valiant Rescue or Hysterical Reaction?
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17232 |
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CURRENT ISSUES
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2 / 1990 |
2,480 Words |
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Hans F. Sennholz
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This is the story of the monumental failure of financial legislation and regulation, of federal deposit insurance that penalizes good managers and bails out the incompetent and reckless, of cartel management that is intended to assure stability but instead brings uncertainty and loss.
More than 500 commercial banks have failed during the 1980s, and more than 3,000 thrift institutions have suffered insolvencies. Yet depositors whose funds were lost may rest assured that their deposits are covered by federal insurance, which, in the final analysis, is underwritten by none other than American taxpayers.
The causes of the disaster are hidden in much controversy and misconstruction. Guided by popular notions and doctrines, most observers exonerate the legislators who built the system and the regulators who guided it every step of the way. They deplore the partial deregulation that took place in recent years. Deregulation, they are convinced, together with management greed and folly, gave rise to the dilemma. Lax supervision permitted S&L managers to squander customer's funds, while S&L depositors stood idly by relying on federal deposit insurance. The obvious solution, we are told, is thorough supervision and control.
Actually, the American financial system was fashioned by legislators and regulators who together created a cartel that is crumbling under the weight of its own contradictions. The system rests on government force rather than voluntary cooperation. Enmeshed in countless laws and regulations, it was unable to cope with the rampant inflation of the 1970s and the globalization of capital markets during the 1980s. In desperation about their sinking ship, the legislators and regulators finally consented to "deregulate"- that is, relax their rules a little. Unfortunately, the deregulation proved to be too little and too late.
President Bush's rescue proposals, which in their essentials were made law on August 9, 1989, contain no significant changes. They call for noisy restructuring of the regulatory system without any change whatever in the basic structure. The same Federal Home Loan bank Board (FHLBB) regulators who guided the system in the past will continue to direct it in the future. But they will do so under a new label, the Office of Thrift Supervision (OTS). The Federal Savings and Loan Insurance Corporation (FSLIC) will join the Federal Deposit Insurance Corporation (FDIC) and be called the Savings Association Insurance Fund (SAIF). Under the new label, these same people will continue to insure S&L deposits at the risk and expense of American taxpayers.
The Reform Act has merely rearranged the chairs on the deck of the regulation liner. The heading has not changed one degree; the speed has accelerated a little. A new captain, the secretary of the Treasury, who serves at the pleasure of the president, has replaced the old captain, the chairman of the FHLBB.
The Reform Act created a new federal agency, the Resolution trust Corporation (RTC), which will be giant government corporation - the biggest ever of its kind. It will take possession and then dispose of some $300-$500 billion in real assets formerly held by defunct S&L institutions. It thereby will crate the potential and temptation for politics at its worst - for fraud and abuse that may permeate the entire system. It also will open the floodgates for
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