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How the Cleaver family destroyed our S&Ls; low mortgages, high CD rates, and money market funds allowed Americans over 40 to take the rest of us to the cleaners
Washington Monthly, Sept, 1990 by James Bennet
How the Cleaver Family Destroyed Our S&Ls
After a fair amount of confusion over which vague entity ("deregulation," "campaign finance") deserved the blame for the $500 billion savings and loan crisis, congressional leaders and the press are helpfully trying to focus the nation's resentment on one of two villains: Neil Bush or Texas. Blaming Neil Bush, however, has turned out to be like shooting at a puppy for peeing on the rug. Texans are easier to hate; one can plausibly assume that those rollicking cowboys were out to burn down the house for fun and profit. Besides, if you believe the press, there are now concrete numbers to back up that suspicion.
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Parroting figures that have appeared everywhere from regional papers to the network news, Curtis J. Lang wrote recently in The Village Voice, "George Bush's home state of Texas will benefit from a massive transfer of wealth from the North to the South in which some $80.2 billion will be infused into the Lone Star State--a gain of $4,775 per person--while New Yorkers will lose over $17 billion in the process. Californians will lose nearly $11 billion, while New Jersey and Illinois will lose over $8 billion apiece." That logic, echoed by governors of northeastern and midwestern states at a July National Governors Association meeting, has found its way to Congress, where some northern representatives are rethinking the benefits of national union. Rep. Howard Wolpe, chairman of the "Northeast-Midwest Coalition," has introduced legislation that in effect would charge a special tax to those states responsible for "excessive costs" in the bailout. "This legislation is designed to hold those who are most responsible to a measure of equity in the bailout burden," said Wolpe, who hails from Michigan, beneficiary of the Chrysler bailout.
Behind all the self-righteous regional bellyaching is the work of one man, a professor of urban studies and public administration at Cleveland State University named Edward Hill. Hill is clearly enjoying his 15 minutes. "It's been wild to watch it break," he says of the media attention his analysis has been receiving. "Knight-Ridder picked it up, then the people at Newsweek called me for their cover story." Later came The New York Times and The Wall Street Journal, appearing with basically the same story on the same day. "And then it was every place," recalls Hill. "It's been fun," he adds. "I mean, nobody pays attention to me. Not even my mother gave me this much attention."
The major media notwithstanding, not everyone is convinced by Hill's analysis. "It's silly," says R. Dan Brumbaugh, former deputy chief economist at the Federal Home Loan Bank Board. "It's a red herring issue," says Edward Kane, professor of banking and economics at Ohio State University. And according to Bert Ely, whom Hill has called "one of the most accurate observers of the [S&L] industry," "This guy Hill from Cleveland has got it all wrong."
Those judgments are a little harsh. There will undoubtedly be some regional redistribution; certainly states like West Virginia--which had neither high-rolling S&Ls nor high-stakes investors--will be net losers once the dust has settled. As we'll see, however, once you poke at them. Hill's concrete numbers start to crumble. Still, the problem with the "regional redistribution" theory is not just that it's inaccurate, but that it distracts attention from the real redistribution that has taken and is taking place: upwards, by age and class. The regional redistribution theory ignores the true culprits behind the slow-motion S&L disaster and the true beneficiaries of the cleanup. Who are those culprits and beneficiaries? Try taking the following simple test:
DID YOU:
* Take out a mortgage in the fifties, sixties, or seventies?
* Invest in a money market fund in the seventies or early eighties?
* Buy a certificate of deposit in the past 10 years?
If you answered "yes" to any of the above, YOU MAY HAVE ALREADY WON SEVERAL THOUSAND DOLLARS! You're at least a cause of the S&L crisis, if not a winner in the Bankers' Bailout Sweepstakes. In fact, aside from the not-insignificant question of intent, the main difference between you and the S&L crooks is that, collectively, you took a lot more money than they did. Oh, also: You've gotten clean away.
It's helpful to think of the S&L bailout--which consists of the government making good on its promise of deposit insurance--as a massive retroactive federal subsidy. Subsidies exist to foster behavior that the market, left to its own devices, would never reward. Sometimes, as with student loans, the government intentionally creates a subsidy to achieve a certain social goal; sometimes, the government just doesn't realize what the heck it's doing. Because of deposit insurance and the jumble of regulations that grew up around it and then were almost haphazardly chopped back, the taxpayers in the past couple of decades wound up sponsoring all sorts of activities that the market would have otherwise frowned upon, to say the least: absurdly low mortgage rates, absurdly dumb construction projects, absurdly high deposit rates. A rogue's gallery of self-dealing insiders raked in billions from this subsidy. Such people should be prosecuted, fined into penury, and forced to serve time or scrub floors. But those actions alone won't clean up the S&L mess, because along the way, the affluent--not just crooks, and not just Texans--also cashed in. The vanguard of the baby boom and its elders (today's Americans over 40) made a fortune thanks to the thrifts' suicide subsidy. It stands to reason that, as the bills come due over the next 30 years, those wealthy people--not all taxpayers--should pay.
