The Savings and Loan Crisis

The savings and loan (S&L) crisis of the 1980s is of interest for two reasons. First, it centered on real estate, and second, the federal government successfully addressed the crisis.
S&Ls were mainstays of U.S. banking for much of the past century. They engaged in basic banking—taking deposits and making loans, mainly mortgage loans—and held to conservative practices and growth targets. But things changed in the S&L industry in the 1970s, and not for the better.
Some background on interest rates and inflation is in order. When inflation increases, the “real return”—the inflation-adjusted return—on a loan or bond decreases. For example, if inflation is 3 percent per year and the interest rate on a loan or bond is ...

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