The Media, the S&L Crisis, and the 2008 Financial Crisis

081008_s_wilmsen_silveradoGoing to journalism school does nothing to prepare journalists to write on economics and finance, and not surprisingly, it is exceptionally difficult to find people who are both excellent writers and knowledgeable about economics. Henry Hazlitt is of course a notable exception (he never went to college) as is James Grant. (Grant, by the way has a new book due out later this year on the Depression of 1921.)

In today’s Mises Daily, Dale Steinreich mentions how one of the main obstacles to understanding the S&L crisis is the fact that most of the people in the media who worked on the issue were incapable of understanding the problem as anything more than a failure to regulate (read: government regulation) the economy properly. In the minds of people with no significant economics training or knowledge (i.e., most journalists) economies can be made to do whatever people want them to do, simply by issuing government edicts. So, if more mortgages should be granted in low income neighborhoods, the government shall simply issue a command that it shall be so. What could go wrong? If something does go wrong it is because people didn’t follow the regulations or because government agents weren’t vigilant enough.

Speak to most journalists (especially ones who like to cover political beats) about the problem of economic calculation or the role of the price system, and you’ll receive a blank stare. (I’ll be the first to admit that there are lots of smart local business reporters out there who are actually interested in this sort of thing, though.)

Nonetheless, a perfect illustration of this blind spot for the complexities of markets and economics is a little book about the Silverado Savings and Loan called Silverado: Neil Bush and the Savings and Loan Scandal. Remember Silverado Savings and Loan? It was notable for two reasons: when it went under, about $1 billion disappeared. Back then, that was a lot of money, and it marked Silverado one of the biggest S&Ls to collapse. The other reason Silverado made headlines was Neil Bush was a member of the board.

The book Silverado is by a person named Steven Wilmsen who now works the metro beat at the Boston Globe, working on local personal interest stories about murders and immigrants, which tells you something about  how interested he is in the financial system. The title of the book implies it is largely about Neil Bush, and if that were the case, it would likely be a very boring book. Fortunately, however, the mention of Bush in the title is really just an attempt to make the book marketable to a larger audience.  The book is really a rather interesting case study about a large Savings and Loan in the 1980s, and its rise and fall. As a record of numerous relevant events about S&Ls in general and that S&L in particular, and as a little snapshot on the regional economy in the Western US during the 80s, it’s quite well done.

Where the book fails badly is in its attempt to explain to the reader the causes of the S&L crisis and the industry’s role in the larger economy. Monetary policy, if it is mentioned at all, certainly occupies no significant place in this book at all, nor does the interaction between the political system and interest rates. Steinreich’s article today covers a lot of this ground, but you wouldn’t know anything about it at all from reading Wilmsen’s book.

Wilmsen does purport to be explaining the root causes of the crisis in Silverado, but really, the entire view of the situation in the book can be reduced to this: People were greedy during the 1980s, so a bunch of evil rich guys got together and ran afoul of federal regulators, causing Silverado to collapse. As this happened in other S&Ls across the nation, the whole system collapsed.

If there is any hero in this book, it is an examiner from The Federal Home Loan Bank of Topeka named Dorothy Van Cleave. Regulators like Van Cleave have “a thankless job” Wilmsen tells us, and that the regulators are the “second line of defense” after boards of directors protecting taxpayers from “bad apples.”  If only there were more regulators, Wilmsen avers, but the regulatory agencies were during the 1980s, “underfunded.” As a result, the federal government was simply too weak to fight the bad apples.

Lacking an understanding of the banking sector and monetary policy, Wilmson doesn’t even ask the correct questions, such as: Why did interest rates do what they did from the 60s through the 80s (laying the groundwork for the S&L interest mismatch)?  What role did subsidized home loans play? What role did the GSEs play? What about moral hazard? There are just a few of the questions that are totally ignored. It’s certainly not difficult to convince me that Neil Bush and his cronies are or were bad guys, or that the politicians in DC are at least as bad. But in the end, the common view of the world spun by journalists is always just a simplistic battle between heroic government regulators and greedy businessmen.

Indeed, with the financial crisis of 2008, we were left with more of the same: people were “greedy” in the years preceding 2008,  and the financial system collapsed because there wasn’t enough regulation. Meanwhile, Fannie and Freddie, The Fed, and moral hazard in the banking system were all routinely ignored by the mainstream press on this. It’s easier to just blame everything on greed, even though greed exists always and everywhere in roughly equal amounts.

The “greed and regulation” narrative makes for some dramatic reading perhaps, but truly understanding how economies work requires much more than the assertions that greed is bad and government regulation is good.

 

 

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