Chapter 2

The 1980s: Booms, Busts, and Bailouts

Financial crises often are described as something akin to a “perfect storm,” in which the simultaneous occurrence of so many unforeseen and unpredictable events can only happen once every 100 years.

But that is far from the truth. Booms, busts, and financial crises have occurred throughout U.S. history, for the most part every 20 years or so. However, only during the last two financial crises—the banking and savings-and-loan (S&L) crisis of the 1980s and early 1990s, and the financial crisis of 2008—have we experienced the additional phenomena of “too big to fail” and the widespread use of taxpayer bailouts.

Perhaps the 100-year flood explanation is a way to justify unpopular taxpayer bailouts, with the follow-on statement, “Don't worry, it won't happen again, at least anytime soon.” But financial markets are becoming progressively more integrated, which means that financial volatility spreads much faster. Unless we learn from history and better prepare ourselves for new challenges, in the years ahead we risk facing larger, more sudden, and more frequent storms, more taxpayer bailouts, continued economic hardship, and social unrest.

The history that remains critically important to understand is the boom-and-bust period encompassing the 1920s and the Great Depression that followed. From 1921 to 1929, the stock market experienced a sixfold increase. Almost everyone wanted to share in the gains, and an article in the Ladies Home ...

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