In the 1980s, the S&L industry was in crisis and the crisis required government
ID: 1097655 • Letter: I
Question
In the 1980s, the S&L industry was in crisis and the crisis required government intervention regulatory changes and punishment for perpetrators of the crisis. From 2007 to 2009 the US finacial system was in crisis and that crisis also required government intervention and regulatory changes.In what ways was the government's response to the S&L crisis similar to its response to the 2007-09 crisis? In what ways was government intervention regulatory change and punishment for perpetrators different??
Explanation / Answer
The S&L crises of 1980s were due to failure of 1/3rd of loan and saving association in US. The reason for their failure was due to financing of long-term loans with fixed interest with short-term money. So, when the Fed increased the rate to tackle inflation, these institutions could not attract adequate capital and become insolvent. Instead of taking active measure to curtail the loss, the lax regulatory authority oversight allowed some CEOs to invent creative accounting strategies and turn the business into Ponzi schemes.
The crisis that occurred has similar bearing with the crises that occurred in 2007-2009. The government had intervened to contain the crises by providing stimulus package to big financial institution with tax payer money. It did the same when S&L crisis occurred. It was estimated that the total cost to exchequer was $350-$450 billion dollar. As for the regulator, some improvement were made to contain the contingency if arises. The problem with the regulator is that over the period the administrative mechanism loses the control and as a result due to lobby and intermediaries the manipulation and creative accounting strategies turn the businesses into Ponzi schemes. The punishment were almost absent because of hold of powerful people in the administration.