A few years ago, when the banking industry was undergoing one of its periodic crises, a spate of television documentaries tried to capture the wheeler-dealer atmosphere that had led to so many spectacular bank failures. But explaining Byzantine financial plays to ordinary viewers wasn't easy, as admitted by one obviously frustrated commentator. "Now pay attention," she told the audience, waving a pointer at a spidery diagram, "because this is real complicated."
The seeming complexities of the financial world, which are exaggerated by insiders' jargon, have a lot to do with the public's--and Congress'--boredom with the subject. But as pointed out by Ned Eichler in "The Thrift Debacle," it behooves the taxpayer to pay attention because billions of dollars in tax money are being thrown down a black hole to pay for the ongoing follies of greedy gamblers and inept bank regulators. Financial experts estimate that every taxpayer will be liable for at least $1,000 in the Bush Administration's 10-year, $126-billion bailout of the crippled savings and loan industry, and that's just a starter: Down the road are bailouts for commercial banks that lent a large chunk of their capital to bankrupt Third World countries and a government that has consistently overspent its income.
Although Eichler's account is densely packed with statistics, it is more readable than many books on financial matters because it deals with a single subject, the plight of S&Ls, or thrifts in bankers' parlance, and his argument is succinct: that the Reagan Administration made a bad situation worse through deregulation and that bank regulators went along with a game in which taxpayers' money in the form of government insurance was used to back unsound and/or illegal loans.
A professor in economic history who has worked closely with the housing industry in California, Eichler has written extensively on house problems and served as a government adviser on the subject. While his book is a relatively balanced account of the thrifts' rise and fall, he obviously feels thwarted by the refusal of government regulators, particularly Richard T. Pratt, to listen to his arguments against deregulation. A brash young finance professor, Pratt was Reagan's first head of the Bank Board, which oversees the S&L industry, and, in Eichler's opinion, the symbol of an idea that propelled Reagan into the White House--to get the federal government "off people's backs." Regardless of its practical consequences, deregulation became a byword at the White House and the fashion in Congress and academia, especially among supply-siders. But as in other matters, Reagan left implementation to "men ill equipped to handle such a delicate task." When queried as to why he never briefed the President on the severity of the S&L crisis, reports Eichler, Pratt's successor at the Bank Board said Reagan had no interest in such matters and that it had never occurred to him to talk to the President.
Eichler begins his sobering tale with a historical overview of S&Ls, the function of which was to finance home construction and purchase, primarily single-family residences. Until the Great Depression, such institutions operated with little government interference, but the collapse of thousands of banks forced the Roosevelt Administration to take an active role in the system's revival. Housing construction has traditionally been a weather vane for the economy, and Roosevelt's government rightly viewed the reactivation of the S&L system as a priority. Medicine was administered through federal loans to prop up the housing market and government insurance to thrifts for deposits of up to $100,000, the latter administered by the Federal Savings and Loan Insurance Corp. (FSLIC).
By 1935 a system had been put in place that would govern the S&L industry until 1980. Though excluded from the activities of commercial banks and required to invest the majorityof their funds in home loans, the thrifts were able to outbid commercial banks for savings deposits through a government regulation that limited the interest that banks could pay for such deposits. As Eichler observes, "Had banks, whose main job was commercial lending, been able to compete equally for savings or had thrifts been free to make non-real estate loans, less money would have been available for housing."