I was reading up on the S&L crisis, the government bailouts required at the time, and the deregulation that preceded it. I'm noticing a lot of similarities with today's headlines.
Wikipedia has a good overview here:
https://en.wikipedia.org/wiki/Savings_and_loan_crisisHere are the similarities I see:
1) Rising Rates and Capital Flight: Causes of each crisis included deposit flight to higher yields available elsewhere (e.g. rising treasury rates) and devaluation of long-term bonds or fixed rate loans made prior to the rate hikes. A rapid series of rate increases under Fed Chairs Volker and Powell was in each case unforseen by banks and bank-like financial companies. Soon their cost of deposits exceeded the yields from their assets and they became insolvent.
2) Post-Deregulation: Each crisis occurred a few years after passage of deregulation bills which made it easier for small banks to take on more risk. For the S&L crisis, these included the 1980 Depository Institutions Deregulation and Monetary Control Act and the 1982 Garn–St. Germain Depository Institutions Act. For the current crisis, fingers are pointing at the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act.
3) Regulatory Forbearance: In both cases, regulators were accused of failing to act swiftly enough, and politicians were found to have pressured regulators to lay off their local banks / donors. In the 80's, Senators John Glenn (D-OH) and John McCain (R-AZ) were rebuked by the Senate Ethics Committee for pressuring regulators in regard to Charles Keating.
4) Right After Reaching For Yield: Each crisis followed a period of low banking returns and fierce competition for loans and deposits that left pre-crisis banks holding lots of low-yielding or risky assets - just prior to a fast series of rate hikes.
5) Office Buildings: Per Wikipedia, one cause of the S&L crisis was "...overbuilding in multifamily, condominium type residences and in commercial real estate in many cities". Looking around, I see large, recently constructed office towers that are suddenly under-utilized because of work-from-home technologies. Office vacancies are at "
their highest on record". According to
the WSJ, about 19% of Manhattan offices are available for lease, office property values are thought to be down 25% since March 2022, and defaults could be rising.
6) Yield Curve: Both crises occurred in a context of a flat-to-inverted yield curve.
7) Inflation: Both crises occurred right after a period of high (>7%) inflation.
The main difference I see in the S&L narrative versus what's happening today is that fraud is mentioned a lot more when talking about the S&L crisis. However, I suspect this is because financial fraud often takes years to uncover, and we are in the early innings of our present banking squeeze.
Charles Keating's corrupt Senators intervened on his behalf in 1987, after regulators in 1986 had found that the S&L had large hidden losses, but Lincoln Savings and Loan didn't collapse and trigger an ethics complaint until 1989. Issues like these only came to light in the later stages of the crisis, and I would frankly be very surprised if the Trump or Biden administrations didn't do some deregulation by leaning. It's good for the economy, after all :-).
What do y'all think? Are we reliving history, or are there major differences we need to think about?
