Is the Fed Bailout Similar to the Savings and Loan Crisis?
Monday August 20, 2007
After reading my blog last week about Fed Bailout - How, Why and Will It Cost Me?, a reader asked:
How is this different from the S&L scandal in the 80s when our dollars had to bail out that situation in the trillions?The Savings and Loan Crisis resulted in the failure of over 1,000 banks with over $500 billion in assets on their books. The FDIC estimates that the total cost to resolve the crisis was $153 billion. This was needed to administer the closing of defunct banks, pay the insurance on savings account deposits, and pay off other debts. Of this, the taxpayer cost was $124 billion.
The Fed's bailout in the current Banking Liquidity Crisis has totaled $24 billion, and this was from assets it keeps on hand for just such emergencies. If the Fed's actions are successful, and liquidity is restored, then the money will be repaid, and it shouldn't cost the taxpayers directly.
However, no ones knows exactly how deep the Subprime Mortgage Crisis goes. This was also the problem with the S&L Crisis, and the reason costs kept mounting. All the experts say the current crisis is short-term, and that we should be back on track by the end of the year. Let's hope they are right.
Comments
The end of the year has come and where are we and again how is this different from the S&L scandal except for the amount?
See my answer at Fed Bailout Looking More Like S&L Crisis
Most if not all of the subprime loans, as well as other adjustable rate loans which were not subprime, were made with the expectation,conveniently provided by the lender,that by the time the interest rate adjusted upward, the appreciated value of the property would provide, upon reappraisal, enough equity to refinance under a conventional mortgage. Although it could be argued that a prudent consumer should have understood that property values couldn’t possibly continue to appreciate at unsustainable levels, most people would assume that there are banking laws in place which would protect people from lending or borrowing under these circumstances. And this would seem to be a reasonable expectation, particularly given the lessons we supposedly learned after the Savings and Loan debacle of the early nineties. But it appears that the regulations were in fact not in place, once again leaving the taxpayer and the people who will lose their homes to pick up the tab.
Hi Randy,
Excellent point. The deeper we dig into this mess, the more similar it seems to the S&L Crisis. Even regulations that were in place were over-ruled by mortgage industry lobbyists – See Subprime Crisis Looking Even More Like S&L Crisis.
obvviously the experts dont know sh&^. the china economic bubble didnt even burst . why do we listen to experts its almost 2009 and the country seems like is heading for depression 2