Panic, Prosperity, and Progress: Five Centuries of History and the Markets

CHAPTER 19

The Savings and Loan Debacle

The savings and loan crisis of the late 1980s was, at the time, the greatest financial calamity to hit the United States since the Great Depression. A confluence of interest rate changes, well-intended government initiatives, and a deliberately lax regulatory environment combined into one of the largest bungles in the history of the U.S. government, which wound up costing taxpayers hundreds of billions of dollars.

Once all the dust settled, nearly half of the thrift institutions in the United States were gone, and the financial framework of the nation would be permanently altered.

■ Good Intentions and Honest Growth

Most Americans in modern times know that the split between those who own their residences and those who rent them is about two-thirds to one-third. At the beginning of the Great Depression, however, these figures were reversed. Home ownership was seen as largely the venue of the solidly middle class and above, and only about a third of Americans owned their residence.

The FDR administration sought to promote home ownership and, as a result, also the home construction industry. What made purchasing a home difficult for most people was that mortgages were only five years in length, climaxing in a substantial balloon payment at the end, and these obligations were beyond the reach of the working man. The federal government established a number of agencies, notably the Federal Housing Administration, to facilitate a much larger market ...