I'm a noob when it comes to most financial history and it seems that I tend to get into a bit of a quandary when arguing with progressives. One such recent discussion involved the Savings and Loans crisis. I was young when this happened and have not done enough research, however, in this particular case, the indication was that deregulation caused the crisis. The Progressive(s) that I was discussing with were mentioning that it was deregulation that allowed the S&L's to take advantage of people, not tell them what they were buying, and generally be evil like all Capitalists.
A quick view of the "Moral Hazard" listed out on Wikipedia site for the Savings and Loan Crisis indicates to me that the Savings and Loans were allowed the Federal financial protection of the banks (FDIC?) but not the regulations that the banks had. This tells me that it was not deregulation that caused this, but rather, Federal monetary protection against failure prompting them to grant poor loan choices.
1. Am I way off in my deduction of the cause of this?
2. Anyone recommend any good (reasonably unbiased) reading on American financial history that would be appropriate for a layman?
I feel that as I grow toward Anarcho-Capitalist, I'll need a much more robust understanding so I'm not left without reasonable defense.
1) Government promises to cover the deposits.
3) Banks become too leveraged, and fail.
It's really a simple recipe, and you can use this same model to explain a lot of the crises around the world. Moral hazard, as you mentioned, fits in because it's the reason the banks want to take on so much leverage. They can take risks and know that someone has promised to bail them out. So they can win but never lose. Regulation is only "good" as a means of undoing the damage the government has caused with FDIC. So government messes up, tries to fix it with more government, and only partly undoes the damage, so we end up not too well off, and paying a lot for it. So yes, deregulation was the proximal cause, but the real question is why the banks had the incentives to take on so much risk in the absence of certain regulations. And the answer is government.
My impresion is that the S&Ls knew thay would be bailed out, which they were. Sorry canot help with the rest.
Regulation (I.E. government policing and safety nets) only serve to make a business take unwise risks that it never would take if it did not have these "regulations".
March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded. Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate.
December, 1982--Garn - St Germain Depository Institutions Act of 1982 enacted. This Reagan Administration initiative is designed to complete the process of giving expanded powers to federally chartered S&Ls and enables them to diversify their activities with the view of increasing profits. Major provisions include: elimination of deposit interest rate ceilings; elimination of the previous statutory limit on loan to value ratio; and expansion of the asset powers of federal S&Ls by permitting up to 40% of assets in commercial mortgages, up to 30% of assets in consumer loans, up to 10% of assets in commercial loans, and up to 10% of assets in commercial leases.
Parts of the 1986 Tax Act also contributed.