When Mr. Bush came back to Washington, the crisis in the savings and loan industry finally emerged on the public agenda. The problem had been safely hidden away throughout the campaign season by a conspiracy of silence involving incumbents of both parties. When the crisis at last crawled from under its rock we learned why the politicians were so eager to keep it concealed. It is a scary beast indeed.
Thanks to the marvels of the last decade's deregulated financial marketplace, we're looking at a savings and loan bailout tab of $100 billion in taxpayers' money. And now that the savings and loan issue is out, the administration is apparently hoping that the segment of the public not personally affected will be put off by the complexity of the issue and so accept the word of the experts and quietly pay the bills.
The desire to bury the issue is bipartisan. As we've been learning recently, some of Democratic House Speaker Jim Wright's more generous friends were endangered savings and loan operators, and Wright is not alone in his embarrassment.
The savings and loan issue is complicated. It's also, to be frank, kind of boring. It has little of the moral pizzazz activists ordinarily look for in an issue. But it's worth attending to nonetheless.
For one thing, in the age of Reagan deficits, a $100 billion commitment of federal funds from existing tax sources (i.e. ordinary citizens) could effectively close off the options for a renewed, publicly funded social agenda. At $100 billion, or more, the savings and loan industry would eat any realistically conceivable Pentagon budget reductions and still be back for dinner.
In addition, the savings and loan crisis has value as a parable for what lies ahead in the larger economy. The crisis is in many ways a study in miniature of the aftershocks from the Reagan Revolution. It represents the confluence of rampant easy-money speculation, deregulated greed and corruption, and the severe economic dislocation in those pockets of Middle America untouched by the Reagan recovery. How it is resolved, and who pays the bill, will tell us a lot about how the damages will be distributed and the lessons learned as the drunken spree of the mid-to-late 1980s fades into the inevitable economic hangover.
FOR DECADES THE savings and loan industry served America well as a protected and strictly regulated system for financing family home purchases. It was a safe, efficient, and fairly boring arena of low finance stereotypically depicted by Jimmy Stewart's Mom and Pop outfit in the movie It's a Wonderful Life. But when the U.S. economy hit the rocks in the mid-1970s, the savings and loan industry felt the effects.
The trouble started a decade ago when then-Federal Reserve Board Chair Paul Volcker began applying austerity measures in the form of drastically increased interest rates. Savings and loan institutions had to start paying higher interest to keep attracting depositors, but their income was tied to long-term home mortgages fixed at the old, lower interest rates.
The problems were compounded when the Reaganauts came to town and deregulated banking and finance institutions. Suddenly there was a whole new array of ways to make money from money. This left the savings and loan industry at even more of a disadvantage in attracting depositors. The savings and loan system might once have been stable and socially useful. But stability and social utility didn't count for much in the go-go '80s.
The Reaganaut answer to the savings and loan troubles was predictable. Deregulate them, too. Savings and loans were set free to play the roulette wheel with the big boys at the banks and investment houses. They just had much smaller bankrolls and much less experience in games of chance. As a result many savings and loan institutions made bad bets and went deeper and deeper in the red.
But savings and loan deposits were still guaranteed (up to $100,000) by the Federal Savings and Loan Insurance Corporation (FSLIC). This government guarantee, plus the relatively low levels of capital required to charter a savings and loan, made the newly deregulated industry a magnet for the kind of sleazeball entrepreneurs who, in earlier times, might have stuck to rolling back odometers and selling swampland.
Then the Midwestern farm economy started bleeding from the jugular. Then prices for Southwestern states' oil went bust. Suddenly, out there in the heartland, small businesses were failing and homeowners were defaulting on mortgages. This meant that savings and loan institutions, already on a shaky foundation, were devastated. The institutions that had been playing fast and loose with their depositors' money were caught the shortest, but even many honest players were taken down, too.
The way the system was supposed to work, bankrupt institutions would have shut down. The government would move in to pay off depositors and sell off the assets. But the '80s defaults were on such a massive scale that the FSLIC didn't have the funds to cover lost deposits. And besides, shutdowns on such a large scale would risk setting off a panic that might take down many large, important, and overextended banks as well. So the solution was to paper over the problem and hope it would go away.
As the '80s wore on, the problem didn't go away. It got worse and worse. Insolvent institutions were kept afloat by government promissory notes that in turn were backed by nothing. Assured of immortality, these institutions continued to live as if there were no tomorrow. They paid higher and higher rates to attract deposits. Thus they went deeper and deeper in the hole on the government dole and drained resources away from solvent institutions.
Now the Bush administration is proposing a long-term strategy to deal with the problem that combines incremental increases in deposit insurance rates with the aforementioned massive infusions of tax-payer money. And, read his lips, he proposes "No New Taxes" to cover the boondoggle. Once you've stripped away the Bush budget's fantasyland projections of future economic growth, it becomes apparent that the bailout tab will have to come from essential government services.
Ralph Nader, for one, has put forward an eminently more reasonable plan to finance savings and loan bailout and reform. He proposes new taxes on the wealthy and corporations who have been on a free ride since 1981. These include a 10 percent surcharge on corporate income tax, a 0.5 percent tax on stock sales, raising the top individual rate from 28 percent to 33 percent, and imposing new taxes on mutual funds, junk bonds, leveraged buyouts, and luxury home mortgages.
Nader's proposal goes right to the heart of the matter, and echoes Jesse Jackson's unjustly ignored "tax-the-rich" program of 1988. What Nader and Jackson realize is that all social progress in America -- whether for the environment, basic industry, the cities, or unemployed youth -- will be effectively on hold until the public sector is refinanced. If the savings and loan bailout turns into yet another welfare program for the rich and infamous, it could help assure that bridges, railroads, cities, and lives will continue to crumble well into the next century.
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