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Full U.S. Deregulation Would Kill Banking

September 30, 1990

It is remarkable how a supposedly learned economist such as Allan H. Meltzer can be so ignorant of history in his "Deposit Insurance System Was Culprit in S&L Mess" (Sept. 16).

To jolt Meltzer's faltering memory: In 1932 a series of bank failures prompted a run on the banks by depositors who feared losing their life savings. In March, 1933, President Franklin D. Roosevelt declared a bank moratorium and the banks were closed until the panic was over. Deposit insurance was enacted to guarantee deposits in an effort to avoid similar panic situations in the future. The bank failures were caused by mounting losses in the bloated values of bank assets because of wide speculation before the Depression.

The 1980s has been a period of rising speculation, with inflationary real estate values, equities and the like, accompanied by a tide of mergers financed by high-risk, high-interest junk bonds.

The emerging economic downturn is bursting the bubble of speculation and the destruction of capital is progressing from one region of the country to another. The relaxation of banking industry regulation and the cuts in regulatory staff during the Reagan Administration has intensified the debacle, permitting fraud and high risk ventures that could have been controlled.

Meltzer points to "administrative failure, regulatory failure, failure of congressional oversight and . . . flawed institutions." Yet he would eliminate regulatory oversight and do away with deposit insurance, which would return us to 1932 when millions lost their savings. Eliminating deposit insurance would result in a mass exodus from the banking system and depositors would put their money where they feel it will be more secure. Meltzer's proposals would guarantee the destruction of the banking system.

STANLEY W. CATE

Los Angeles

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