COMPARING FINANCIAL CRISES: WE'VE BEEN THROUGH THIS BEFORE

In 1990, the Progressive Review ran an article by Sam smith, "No-Fault Capitalism Meets Lemon Socialism" in which he examined the second great savings & loan scandal: the bailout of the S&L industry. The article won an Utne Reader award as one of the ten most undercovered stories of the decade. In it, we compared the government's reaction to the S&L crisis to its reaction to the banking crisis that culminated in the banking holiday and emergency legislation of 1933. Although the causes of the two crises were quite different, so were other factors. Some may ring a bell in today's financial crisis.

1933

Underlying financial problem involved shortage of deposits.

Fraud was not a major factor

Single bi-partisan goal: to save the banking system

Protection of average citizens' interest central to decisions.

Long-range implications of actions thought through

Majority party not beholden to major financial interests

Pressure for nationalization of banking industry by progressives such as Sen. Robert LaFollette, creating a political middle for FDR to work within.

Administration and Congress moved decisively. Within five days of FDR's inauguration, emergency banking legislation was passed with only 40 minutes of House debate. From introduction to president's signature it took only eight hours.

Problem affected 18,390 banks Administration handled specific cases quickly. About two thirds of all banks were opened under government license four days after bank holiday was declared. Another 1300 banks were reopened a month later and within nine months another 1200 banks were reopened and the remaining 2000 would be reopened as soon as financing from the Reconstruction Finance Corporation could be arranged.

Specific situations handled by small bureaucracy in decentralized fashion with banks placed under conservatorships. Emphasis on recapitalization and low interest loans.

Government allowed to participate in recovery by holding preferred stock in commercial bank. At one point, the RFC held $1.3 billion in commercial bank stock.

Heavy White House pressure on banking industry to cooperate. Appeal to patriotism, implicit threat of nationalization.

1990

Underlying financial problem involved failure of loan repayments

Fraud is a major factor

Multiple and conflicting bi-partisan goals including changing the financial system (even to extent of eliminating S&L industry), avoiding blame, escaping political and criminal liability.

Protection of major financial institution's interest central to decisions.

Decisions driven by fire-sale mentality

Both parties beholden to major financial interests.

No significant progressive pressure for radical solutions, hence politics of situation skewed heavily toward rightwing assumptions.

Administration and Congress moved indecisively. Early actions were driven by attempt to conceal from public the true extent of the problem. When situation got out of hand, legislation was passed hastily with inadequate forethought.

Problem affected 2600 savings & loans

Administration handles specific situations at snail's pace. The Resolution Trust Corporation dealt with only 200 out of 450 failed thrifts in its first eleven months, with another 260 S&Ls expected to go under in the next year.

Specific situations handled by large centralized bureaucracy in Washington, adding the inefficiency of scale to other problems.

Emphasis on government subsidies and lemon socialism. Rightwing paradigm prevents government from engaging in self-supporting solutions.

No political or financial burden placed on S&L industry as a whole. Political leverage of White House lies fallow.