The Savings and Loan Crisis All Over Again?

I have to wonder whether the Fed’s current plan to prop up Fannie Mae and Freddie Mac is the Savings and Loan crisis from the 1980’s coming back for a reprise. Here we are with both Fannie Mae and Freddie Mac suffering huge loses. So huge that the Federal Reserve (along with both the Bush administration and Congress) wringing their hands over how to help the two mortgage giants remain alive so that their collapse will not trigger a financial system meltdown. But it’s not just Fannie Mae and Freddie Mac that the government is bailing out, there are other financial institutions that the government is offering to prop up and save at the cost of the tax payers. An interesting article on MSN Money by Bill Fleckenstein does an excellent job of summarizing how there seems to be very little outcry from the public at large for the government’s bailing out of these financial institutions which have pretty much brought our economy to a grinding halt. How did this happen? Pretty easily. While banks, typically, are supposed to be tightly regulated, a whole bunch of unregulated financial players entered the scene in the late 90s in early part of this decade. These players were not of a concern to Alan Greenspan, then chairman of the Federal Reserve Board. In his opinion, “the market would enforce disciplened risk-taking” (Krugman, Paul, “Another Temporary Fix“, The New York Times, July 28, 2008 ) As Paul Krugman notes in his op-ed in the New York Times:

Far from being disciplined in their risk-taking, lenders went wild. Concerns about the ability of borrowers to repay were waved aside; so were questions about whether soaring house prices made sense.

Lenders ignored the warning signs because they were part of a system built around the principle of heads I win, tails someone else loses. Mortgage originators didn’t worry about the solvency of borrowers, because they quickly sold off the loans they made, generally to investors who had no idea what they were buying. Throughout the financial industry, executives received huge bonuses when they seemed to be earning big profits, but didn’t have to give the money back when those profits turned into even bigger losses

(Krugman, Paul “Another Temporary Fix“, The New York Times, July 28, 2008 )

Well, those losses are now coming out more and more. Every day when we think that we’ve seen the worst and we’ve turned a corner we get another round of announcements by the financial institutions. Just last night, after the market closed, Merrill-Lynch announced another $6 billion (that’s a ‘b’, yes) in write-downs — i.e. losses that they’ll just have to take) Citigroup is indicating that it may announce another $8 billion in write-downs and two more banks have been taken over by the FDIC. How did all this happen? It’s quite complicated but James Grant of the Wall Street Journal does a good effort in trying to explain some of it in his article “Why no outrage?”

Why is there no outrage from the public that our government is doing all it can to bail out these financial institutions and very little to help the average homeowner? Perhaps because, as John McCain believes, the government feels that the homeowners got themselves into this mess as if the institutions bear no blame? That would be typical of this administration and this Congress. I’m not sure myself as to why there isn’t more of a public outcry. I’m of the opinion that these Wall Street institutions should bear more of their pain rather than put it onto the average tax payer. To me this sounds alot like the old Savings and Loan Crisis from the mid to late 80s. During the time period from 1986 to 1995 about 50% of all federally insured Savings and Loans were wiped out by…you guessed it…unsound real estate lending (“Savings and Loan Crisis“, Wikipedia, July 21, 2008, http://en.wikipedia.org/wiki/Saving_and_Loans_Scandal) — sound familiar? And who got to foot the bill in the end? The taxpayer — to the tune of approximately $160 billion dollars and severe budget deficits and an economic recession in the early 90s. (“Savings and Loan Crisis“, Wikipedia, July 21, 2008, http://en.wikipedia.org/wiki/Saving_and_Loans_Scandal) And the outlook from this mess doesn’t look any better. Thanks Wall Street.