Too Little, Too Late

The Bush Administration deserves credit for moving quickly to address the Savings & Loan crisis. The proposed changes in bank regulation and in deposit insurance, however, are too little to assure (in President Bush’s words) “that this situation is not repeated again.” And the proposed schedule for closing or merging the insolvent savings banks is too late to minimize the costs to taxpayers and to other banks.

How did “this situation” arise, in which taxpayers are now obliged to pay some $100 billion to protect the insured deposits in the insolvent savings banks? The primary source of the problem is a very flawed insurance contract between the federal deposit-insurance agencies and depositors. The deposit-insurance agencies were established in 1933 for commercial banks (FDIC) and in 1934 for savings banks (FSLIC). Though Franklin Roosevelt and most of the nation’s bankers opposed federal deposit guarantees, they were introduced in the hope of avoiding a repetition of the general financial panic of late 1932 and early 1933.