what was the 1980s savings and loan crisis?
In: Economics
A “Savings and Loan Association” (S&L) is an institution that accepts savings from members and gives them as loans to other members. Basically a bank for members only (similar to a credit union). They were especially used for family home mortgages
The crisis started when the Federal Reserve bank increased the interest rate in 1979 to fight inflation. The S&L’s were contractually bound to long running loans that now had a lower interest rate than what they would be able to get money for from the central bank. Their costs increased while their income stayed the same.
They tried to solve this issue by trying to attract new deposits, but for that they had to pay more interest on savings wich drained their already thin finances even more. A few of them also tried to break out of this through highly speculative investments (basically gambling their customers money, wich was possible due to the lax regulation at the time)
The aftermath was that one third of the S&L’s went bankrupt and the government used about $120 billion of taxpayer money to prevent a complete collapse
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