You ignore the major factors that turned this into a “crisis.” The deregulation allowed S&Ls to take on riskier investments, operate with inadequate capital reserves, write-off debt as goodwill then record it as an asset in their financial statements….they violated generally accepted accounting principles.

“because the rise in home prices elsewhere due to inflation kept other S&L’s adequately capitalized to ride it out.” No……the S&L crisis occurred at the same time the bottom fell out of other (non-oil) real estate markets in the country, albeit for other reasons.

“BTW, we were not importing natural gas from OPEC” Yes – thanks. I am aware of that. I was responding to your statement: “Carter’s interference destroyed the domestic petroleum industry” and your references to OPEC and the related problems in the petro market.

“[Smith] was a genius, but also a weird duck.” Ha ha….they usually are.

The artificial rise in interest rates certainly hurt, but note that other S&L’s that were not invested in the Oil Patch made it through in spite of that problem. The only S&L’s that failed were those with large portfolios in the Oil Patch, because the rise in home prices elsewhere due to inflation kept other S&L’s adequately capitalized to ride it out.

But for those which had much or all of their security based on Oil Patch real estate, there was no chance to survive. Though other factors contributed, that localized collapse in real estate value was the overriding factor.

BTW, we were not importing natural gas from OPEC. And yes, Smith did have a deep distrust of banking, but he also accepted a job as a bureaucrat while railing against them. He was a genius, but also a weird duck.

Don – thank you for explaining your point.

However, you’ve provided an oversimplified, inaccurate version of history. For one thing financial crises are never cause by one single event. To say that Carter’s policy and the fallout in the petro industry caused the S&L scandal is misleading. With respect to the destruction of the oil industry – OPEC’s oil embargo against the U.S. caused the initial shortage…. not one, unusually cold winter.

Further, the glut in the oil industry, while it certainly devastated real estate markets in “oil patch states” was not the sole cause of the S&L crisis either, as you imply. If this were possible why didn’t the nation experience financial crises when real estate markets in Michigan suffered the loss of auto manufacturing jobs or when real estate in SC bottomed out after the loss of textile mills? Because you’ve overlooked the key elements that drove a national S&L crisis: (1) the deregulation (in the 80’s) of the S&L industry (2) the Fed’s effort to reduce inflation by raising short-term interest rates ….at a time when most of S&L’s asset holdings included low, fixed-rate mortgages, (3) the junk bond offerings of Milken and friends, and (4) the investment of oil profits earned by OPEC during the oil crisis that were invested in dollar-denominated assets held outside U.S. banks.

Looking at the entire economic and financial environment leading up to both crises, I have to agree with Vivian’s original post – “We were supposed to have learned something at that time that would avoid such things happening again.”

By the way, Adam Smith believed the banking industry to be an exception to free-market principles.

Everyone who will be hurt by the shakeout of the financial meltdown has, at some point, sought to gain at the expense of others through deception or willful ignorance.

That includes the homeowner who borrowed against fantasy equity to buy luxuries or to finance risky investments, the home buyer who took an ARM on a house he knew was beyond his means at normal interest rates, the loan company that arraigned the loans and resold them to investment houses knowing that when rates went up, the buyer would default, and the investment houses who sought high returns from those buyers by trapping them in an ARM with no upper limits. Everyone of them has earned the hardship they will endure.

That includes me, BTW, I failed to do due diligence when my financial adviser recommend a real estate trust because of its high yields during the housing boom and I have lost several thousand dollars of my investment because I did not check to see how heavily that trust was into speculative investments. Serves me right for being lazy.

But it is only when government intervenes that honest taxpayers and others who did not create the problem are injured.

I’ll take my lumps for being an overly trusting investor, but I object to my taxes bailing out the truly dishonest and greedy manipulators of the banking system.

Oh wait. No, it turns out the fact that one out of 557 homes was in foreclosure last month and unemployment is climbing over 5% is still the bigger problem in America today. Haha, whew, that was close, I thought we were going to face a serious crisis of investor psychology. Thank goodness it’s mundane stuff like stagflation, foreclosure, runaway debt and unemployment that we have to deal with, because how much beta a Wall Street investor is willing to keep in his porfolio is some pretty scary stuff.

How about thinking before you post – is that so much to ask?

I am ignoring nothing. I’m saying that if the government eliminates risk from the financial world, then we are going to see more stupid actions and then the expectation that the taxpayers will foot the bil for them.

Read that over slowly a couple times and even you might understand it.

Bill Walters, who later would give everything to his wife to avoid bankruptcy, had 20-30 buildings at least that were empty and no market with which to fill them. There were hundreds of empty buildings (some in the Denver Tech Center). Silverado (thanks Neil Bush!) was only one of a group of S&L’s that went under. John McCain was involved and was one of the ‘Keating Five’.

It rocked Denver pretty severely. On top of years of bust in the boom and bust cycle (mostly due to oil this time), they could ill afford a huge inventory of buildings that would sit empty for years.

If you’re in the middle of the ocean, and you’re constantly bailing water out of your boat, the problem isn’t the energy you’re wasting bailing–the problem is that you’re sinking. Likewise if you think the problem was JP Morgan’s fed-backed bailout of Bear Stearns because it takes the flavor out of risk, you’re ignoring the larger question of why a bailout was necessary in the first place.

An $80K loan on a $100K house is a good loan, but if the price of that home falls to $50K, it is all-of-a-sudden an under-capitalized loan. If millions of homes in a restricted geographical area lose half their value in less than a year, and the homeowners lose their jobs and walk away from those homes, leaving the S&Ls with hundreds of thousands of repossessed homes and no buyers at any price, and you have an S&L scandal. So, how does that happen?

In the late 70′s there was a shortage of natural gas for heating homes in the Northeast during an unusually cold winter. Carter decided to fix that with the Fuel Use Act which forbid using natural gas as boiler fuel for generating electricity or steam for industrial processes, thinking that by not allowing NG to be “wasted” for commercial purposes, it would become available for home heating in the Northeast. Only the reason for the shortage in the NE was not lack of supply, it was the Federally controlled price of NG which was too low to support building the pipeline capacity to bring it up.

The result was that the industry in the ‘oil patch states’ that relied on natural gas as a cheap fuel was destroyed and the profitability of drilling for oil was greatly diminished. Oil and natural gas are usually found together and in many formations, you can’t produce the oil without also producing the gas. With no place to sell the gas, as it was forbidden for boiler fuel where it was available and still was priced too low to build pipelines, those fields were just closed. Still, with oil at $40 a barrel, up from $17 a few years before, the industry limped on. Then, in the eighties, Reagan broke OPEC and the price of oil fell back to $18. Congress still wouldn’t deregulate NG for a few more years, so with the oil price down and NG still unprofitable by law, the domestic petroleum industry collapsed.

That’s why I live in VA now instead of LA. My home town went from 18K pop. to 12K in a year as people left looking for work since unemployment in the oil patch was 40%. The banks owned 1/3 of the real estate in town and there were no buyers. My $110K home sold for $41K after 2 years on the market. I took the loss because I had it mostly paid for, but most people just walked away from their mortgages.

That’s what caused the S&L scandal. Carter’s interference destroyed the domestic petroleum industry, which caused a mass migration from those areas that were dependent on oil exploration, crashing the housing market in those areas at a time when it was booming everywhere else. From outside those areas, it may have looked like the S&L’s were making bad loans, but in reality, they were good loans to good people who were just destroyed by a localized depression caused by a meddling fool with no understanding of economics.

The simple fact is this market was going to fail, it’s just a matter of when and how much. Things are worse now than they had to be because we kept delaying the inevitable and exascerbating the problem by fiddling, but even if we’d let the free market do its thing, we’d be sitting here wondering how many of us are going to lose our jobs. At some point someone should have exercised the leadership necessary to say to lenders, hey, quit being stupid, you’re about to ruin a good thing for the rest of us.

I am furious that the perpetrators of the current home foreclosure are being rewarded with a bail out. No discussion, no nothing. Who gave the FEDS the power to USE my taxes at their discretion. I’ve already contacted my congressional representatives and asked them to close that loophole and fast.

IF it is absolutely necessary to give some funding to the banks than the executives responsible should have to resign first AND GIVE UP THEIR GOLDEN PARACHUTES so that money can also be used to help finance the bank’s restructuring.

Personally I would prefer the money go to the victims not the perpetrators and all the folks who got greedy and created this mess by pushing for deregulation so they could make these shady deals should go down in the rubble heap. I don’t want to bail out these greedy risktakers.

buzz…buzz…

Hence, we have government interference to prevent the inevitable crisis in confidence that will inevitably occur when people get overconfident and too greedy.

Bears’ stockholders did get punished, getting only $2 per share when Morgan bought them out (with a gov’t guarantee that they wouldn’t get hurt) Without the guarantee, Morgan would still have bought Bear, but probably at an even lower share price, which is what should have happened.

BTW, the Savings and Loan debacle was not caused by greed in the financial industry, it was caused by Jimmy Carter’s interference in the natural gas market. It just took a while for those chickens to come home to roost.