Savings and loan crisis

Definition

The savings and loan crisis refers to the financial turmoil that affected savings and loan associations (S&Ls) in the United States during the 1980s and early 1990s. This crisis was marked by the failure of numerous S&Ls due to mismanagement, risky investments, and deregulation, leading to significant economic repercussions and the necessity for government intervention. The fallout from this crisis not only triggered a recession but also challenged the political promise of 'Read My Lips,' which was a pledge by a political leader not to raise taxes.

5 Must Know Facts For Your Next Test

1. The savings and loan crisis resulted in the failure of around 1,000 S&Ls, costing taxpayers an estimated $124 billion in bailouts.
2. Prior to the crisis, S&Ls were heavily invested in real estate; however, poor lending practices and high-risk investments led to significant losses.
3. Deregulation in the early 1980s allowed S&Ls to engage in more aggressive investment strategies, contributing to their financial instability.
4. The government responded by creating the Resolution Trust Corporation (RTC) in 1989 to manage and resolve the failed institutions.
5. The aftermath of the crisis led to a reassessment of regulatory practices in the banking industry, impacting policies for years to come.

Review Questions

• How did deregulation contribute to the savings and loan crisis in the 1980s?
  • Deregulation allowed savings and loan associations greater freedom in their investment choices, leading them to engage in high-risk loans and speculative real estate investments. With less oversight, many S&Ls made poor financial decisions that eventually resulted in massive losses. This lack of regulation created an environment where mismanagement flourished, contributing significantly to the widespread failures seen during the crisis.
• Discuss the role of the Resolution Trust Corporation in addressing the fallout from the savings and loan crisis.
  • The Resolution Trust Corporation (RTC) was established to manage the assets of failed savings and loan associations and oversee their liquidation. The RTC aimed to stabilize the banking system by selling off properties and loans from these institutions, recovering as much taxpayer money as possible. Through its efforts, the RTC played a critical role in restoring confidence in the banking system and facilitating reforms that would prevent future crises.
• Evaluate how the savings and loan crisis affected public perception of political promises like 'Read My Lips' regarding tax policy.
  • The savings and loan crisis significantly undermined public trust in political leaders, particularly regarding promises like 'Read My Lips,' which committed not to raise taxes. As taxpayers were forced to bail out failed S&Ls, many felt betrayed by politicians who had promised fiscal responsibility without acknowledging necessary compromises. This erosion of trust contributed to a more skeptical view of government economic policies and highlighted the challenges faced by leaders trying to balance budgetary constraints with public expectations.

Related terms

Deregulation: The process of removing or reducing government rules and restrictions on financial institutions, which contributed to the reckless behavior of S&Ls leading up to the crisis.

Resolution Trust Corporation (RTC): A government-owned asset management company created to liquidate assets of failed S&Ls and manage their bankruptcies during the crisis.

Economic Recession: A period of temporary economic decline during which trade and industrial activity are reduced, often accompanied by a rise in unemployment, which was exacerbated by the savings and loan crisis.