The Great Banking Scandal; H. Sennholz

404 THEFREEMAN IDEASON LIBERTY The Great Banking Scandal by Hans F: Sennholz F ederal Reserve Chairman Alan Green span recently shocked the financial world when he estimated the eventual cost of the savings and loan bailout at half a trillion dollars. And Treasury Secretary Nicholas Brady added a jolt by admitting that taxpayers must bear most of the burden. It is a scandal, all agree, the greatest ever in u.s. financial history. It is greater by far than the bail outs of Chrysler, Lockheed, and New York City, even greater than the costs of the default of Third World debtor countries. In ages past, it would have been ignored as a malicious story that was absurd and impossible. Yet, it is as real as the S&L losses and bankruptcies. It is even more scandalous that most of the per petrators are escaping unscathed. The legislators and regulators who created the system during the 1930shave left the stage of life and can no longer be held accountable. But there are many who helped to fashion the S&L structure, who drafted and enacted the Depository Institutions Deregula tion and Monetary Control Act of 1980that stoked the fires of inflation, and the Garn-St. Germain Act of 1982 that invited crooked appraisals and dubious accounting. They are making their escape.

A few politicians actually paid a nominal price for the damage they inflicted. Representative Fer nand St. Germain of Rhode Island, coauthor of Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is the author of the 57-page booklet The Savings and Loan Bailout: Valiant Rescue or Hysterical Reaction? available from The Foundation for Economic Education at $4.45. the law that made matters worse, was defeated for re-election. Speaker Jim Wright, who badgered Federal regulators for his favorite S&L bankers, resigned in disgrace. Five Senators are at risk be cause they intervened with regulators on behalf of big campaign donors. Yet, no Representative or Senator is expected to lose a penny from the debacle. In fact, they voted themselves several boosts in salaries and pensions and are about to raise them again. The politicians who created and nurtured the system are quick to point at the bankers who saw an opportunity to splurge and steal. Some 50 thrift officials and accountants already have been con victed, and more are likely to face indictments as inquiries proceed. But even if a few hundred incompetent and corrupt owners and managers should be found out, their numbers are puny when compared with some 50,000employees laboring in the industry. It is unlikely that the number of industry perpetrators will ever reach 1 percent of employees, but it is obvious that more than one half of legislators created and fashioned the system and that regulators guided it every step of the way.

The greatest outrage, however, is the lack of Congressional interest in the causes of the disaster. There are no hearings, no investigations, no spe cial prosecutors, not even committee debates on the real causes of the scandal. Congress is visibly skirting the real issue. The reasons for such conspicuous silence may be as numerous as the voices against the hearings and investigations. Some legislators undoubtedly are convinced that they have the answer: the irresponsibility and greediness of bankers. Many newspapers and broadcast media share this opinion, which implicitly exculpates the legislators. The conspicuous silence may also hide an awareness of guilt. Many legislators not only cast their votes for the systembut also have used it, and continue to use it, for their own ends. Savingsand loan associations and other government-spon sored and regulated institutions are among the most generous contributors to the re-election cam paign funds of the politicians who legislate and regulate the conditions of S&Lexistence.The con tributions amount to many millions of dollars, bolstering the political and financial fortunes of incumbents. Surely, any Congressional investiga tion would soon discover the connection, which would be rather embarrassing to the legislators.

Public opinion, which offers a ready answer to all things, usually points at a lax Reagan Adminis tration and a reckless industry.It neither theorizes nor analyzes, nor argues on grounds of inexorable principle. In vague and eclectic fashion, public opinion clings to simple notions of good and evil, command and obedience. It places the blame on evil bankers and lazy regulators who neglected their police function. Actually,the bankers' greed and the regulators' negligence merely are visible symptoms of much greater evil. The real cause of the disaster is the very financial structure that was fashioned by leg islators and guided by regulators; they together created a cartel that, like all other monopolistic concoctions, is playing mischief with its victims. The structure was erected on the foundation of government force rather than voluntary cooper ation. Held together by numerous laws and regu lations, it weakened from the inflation fever of the 1970s and growing institutional competition during the 1980s.It suffered severely during the Nixon, Ford, and Carter Administrations which lifted interest rates high above the rates S&Ls were permitted to pay and charge. As depositors withdrew their deposits and turned to higher yielding money market funds, S&Ls were caught in the vise of inflation and regulation. Moreover, rising interest rates caused S&L instruments consisting primarily of long-term mortgages to plummet in price. All S&Ls suffered staggering losses. It is surprising that some actually managed to survive.

405 In desperation about their sinking ship, the leg islators finally consented to "deregulate," that is, they relaxed some rules while they tightened oth ers. They passed the Depository Institutions De regulation and Monetary Control Act which reduced aggregate reserve requirements for Fed eral Reserve member institutions by about 43 per cent and tightened Federal Reserve control over financial institutions. To lower reserve requirements is to pour more fuel on the fires of inflation. The 43 percent reduc tion that member banks experienced was unpre cedented in scope and magnitude; it flooded the markets with new credits, caused interest rates to skyrocket to a 20 percent prime rate, and pre cipitated an inflation rate that reached a staggering level of 18 percent. To control the price inflation, the Carter Administration then invoked the Credit Control Act of 1969 and placed controls not only on banks and thrift institutions but also on all con sumer lenders, such as retailers and auto dealers.

The Depository Institutions Deregulation and Monetary Control Act extended Federal Reserve credit controls by imposing reserve requirements on all transaction accounts. At the same time, credit unions, savingsbanks, savingsand loan insti tutions, and nonmember banks were required to keep their reserves with the Fed. In short, the extension of Federal Reserve controls and the expansion of Federal Reserve funds greatly tight ened the vise that was to crush more than 3,000 thrift institutions. The S&L industry is a component part of the American financialcartel that builds on legislation and regulation. Federal deposit insurance was added in 1933to prevent a repeat of the sad bank ing picture of the Great Depression. Unfortunate ly, government insurance is self-defeating. The greater the protection government provides, the greater the risks the insured are willing to take. Depositors who are fullyinsured have no incentive to select a solid bank over a poorly managed bank.

Federal deposit insurance contributed to the deba cle of the S&L industry. As with so many government programs gone awry,the S&L system was born of good intentions and economic ignorance. Unfortunately, the eco nomic ignorance of politicians and officials is always visited on the people. It is visited anew on the American people who are facing a bailout bill of some $500 billion. 0 406 Boom Time for State and Local Government by John Hood I f the press has anything to do with it, the 1990s will be a decade of higher taxes and government expansion in America. The last year or.so has seen article after article, editorial after editorial, proclaiming an end to the "Dec ade of Greed" and calling for a new surge of ac tivismand a corresponding surge in taxes to pay for it. Much of the media's pro-tax and pro-gov ernment sentiment coalesced around Earth Day 1990, which was really a couple of months of constant calls for America to "invest in a clean environment. "