became the epitome of the new breed. Earlier in his political career, he had been the paragon of free enterprise and individualism. He spoke out against big government and for the free market, but in mid life he reset his sail to catch the shifting political wind. He went down in history as a pioneer of socialism in America.
It was FDR who took the next step toward government
paternalism in the S&L industry—as well as the banking industry—by establishing the Federal Deposit Insurance Corporation (FDIC) and the Federal Saving and Loan Insurance Corporation (FSLIC). From that point forward, neither the public nor the managers of the thrifts needed to worry about losses. Everything would be reimbursed by the government.
A HOUSE ON EVERY LOT
At about the same time, loans on private homes became
subsidized through the Federal Housing Authority (FHA) which allowed S&Ls to make loans at rates lower than would have been possible without the subsidy. This was to make it easier for everyone to realize the dream of having their own home. While the Marxists were promising a chicken in every pot, the New Dealers were winning elections by pushing for a house on every lot.
In the beginning, many people were able to purchase a home who, otherwise, might not have been able to do so or who would have had to wait longer to accumulate a higher down payment. On HOME, SWEET LOAN
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the ether hand, the FHA-induced easy credit began to push up the price of houses for the middle class, and that quickly offset any real advantage of the subsidy. The voters, however, were not perceptive enough to understand this canceling effect and continued to vote for politicians who promised to expand the system.
The next step was for the Federal Reserve Board to require banks to offer interest rates lower than those offered by S&Ls. The r e s u l t was that funds moved from the banks into the S&Ls and became abundantly available for home loans. This was a deliberate national policy to favor the home industry at the expense of other industries that were competing for the same investment dollars. It may not have been good for the economy as a whole but it was good politics.
ABANDONMENT OF THE FREE MARKET
These measures effectively removed real estate loans from the free market and placed them into the political arena, where they have remained ever since. The damage to the public as a result of this intervention would be delayed a long time in coming, but when it came, it would be cataclysmic.
The reality of government disruption of the free market cannot be overemphasized, for it is at the heart of our present and future crisis. We have savings institutions that are controlled by government at every step of the way. Federal agencies provide protection against losses and lay down rigid guidelines for capitalization levels, number of branches, territories covered, management policies, services rendered, and interest rates charged. The additional cost to S&Ls of compliance with this regulation has been estimated by the American Bankers Association at about $11 billion per year, which represents a whopping 60% of all their profits.
On top of that, the healthy component of the industry must spend over a billion dollars each year for extra premiums into the so-called insurance fund to make up for the failures of the unhealthy component, a form of penalty for success. When some of the healthy institutions attempted to convert to banks to escape this Penalty, the regulators said no. Their cash flow was needed to support the bailout fund.
INSURANCE FOR THE COMMON MAN?
The average private savings deposit is about $6,000. Yet, under the Carter administration, the level of FDIC insurance was raised 70 THE CREATURE FROM JEKYLL ISLAND
from $40,000 to $100,000 for each account. Those with more than that merely had to open several accounts, so, in reality, the sky was the limit. Clearly this had nothing to do with protecting the common man. The purpose was to prepare the way for brokerage houses to reinvest huge blocks of capital at high rates of interest virtually without risk. It was, after all, insured by the federal government.
In 1979, Federal Reserve policy had pushed up interest rates, and the S&Ls had to keep pace to attract deposits. By December of 1980, they were paying 15.8% interest on their money-market certificates. Yet, the average rate they were charging for new mortgages was only 12.9%. Many of their older loans were still crunching away at 7 or 8% and, to compound the problem, some of those were in default, which means they were really paying 0%.
The thrifts were operating deep in the red and had to make up the difference somewhere.
The weakest S&Ls paid the highest interest rates to attract depositors and they are the ones which obtained the large blocks of brokered funds. Brokers no longer cared how weak the operation was, because the funds were fully insured. They just cared about the interest rate.
On the other hand, the S&L managers reasoned that they had to make those funds work miracles for the short period they had them. It was their only chance to dig out, and they were willing to take big risks. For them also, the government's insurance program had removed any chance of loss to their depositors, so many of them plunged into high-profit, high-risk real-estate developments.
Deals began to go sour, and 1979 was the first year since the Great Depression of the 1930s that the total net worth of federally insured S&Ls became negative. And that was despite expansion almost everywhere else in the economy. The public began to worry.
FULL FAITH AND CREDIT
The protectors in Washington responded in 1982 with a joint resolution of Congress declaring that the full faith & credit of the United States government stood behind the FSLIC. That was a reassuring phrase, but many people had the gnawing feeling that, somehow, we were going to pay for it ourselves. And they were right.
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Behind the troubled banks and the increasingly troubled insurance agencies stands 'the full faith and credit' of the Government—in effect, a promise, sure to be honored by Congress,
