The Financial Panic: Never Again – Forbes.com
A failure to understand the lessons of previous crises led to economic collapse.
Excerpt found on www.forbes.com
The panic of 2008 absolutely should not have happened. Its seeds were sown by our failure to understand the lessons of the 1980s and our misguided responses to that crisis. The Senseless Panic of 2008 led to a collapse of the economy and caused enormous pain to millions of people. It must never happen again.
I cannot emphasize enough how important it is that we understand the causes of the financial crisis in 2008 and that we enact the right reforms this time. Those who do not remember and understand history will repeat it.
The S&L crisis was caused by the failure of our political leaders to keep inflation in check during the 1970s, which led to interest rates of a magnitude never before witnessed in this country–interest rates so high that almost no financial institution or borrower could withstand the onslaught. The problems were compounded by the failure of political and industry leaders to reform the S&L charter and bring it into the modern era a decade before the crisis.
A very bad situation turned into a disaster when the Reagan Administration and congressional leaders refused to tackle the problems and instead decided to let S&Ls with poor management and little or no capital grow their way out of their problems. In the five-year period from 1984, when I warned Treasury Secretary Jim Baker of the looming S&L crisis, to 1989, when the first Bush Administration and Congress moved to clean up the S&L mess, the cost of resolution increased nearly 10-fold from an estimated $15 billion to nearly $150 billion (or roughly $450 billion in terms relative to today’s federal budget).
These losses did not need to occur. The FDIC faced up to very similar problems in the savings bank industry, allowing savings banks to get through the very difficult economic times but not allowing them to increase their risk profile. The result was roughly $2 billion of losses to the FDIC and none to taxpayers.
We reacted to the S&L crisis by blaming “greedy” bankers, just as many have done with the crisis of 2008. It is a politically easy target that deflects attention away from the real issues. Someone once said that blaming greed for bank failures is akin to blaming gravity for airplane crashes. Greed, like gravity, is a force of nature. Greed is an important force in our free enterprise system. The government should recognize that greed exists and control it, just as the government recognizes that airplanes will fall from the skies if planes are not properly maintained and operated by skilled professionals.