The savings and loan crisis of the 1980s occurred when the government loosened regulations on savings and loan institutions, allowing them to diversify into riskier and more profitable financial investments. This resulted in a massive increase in real estate construction, especially in markets like Texas. When there was not enough demand for these new constructions, and loans began to fail, the industry found itself in financial peril.Continue Reading
At least part of the deregulation process was done to correct a legitimate problem the savings and loan institutions faced. As interest rates increased in the 1970s, many of the fixed-rate mortgages the institutions had issued in the previous decade were becoming unprofitable. In effect, these organizations began to lose money on every loan. When restrictions were loosened, many of the S&L companies were in poor shape financially, and began making risky investments in order to rebuild their balance sheets.
Another major contributor to the crisis was the delay in facing the serious problems in the industry. In many cases, politicians intervened on the behalf of these institutions in their local districts, delaying their inevitable collapse. By the time the government began to take action on the crisis, the scope of the problem had grown so large that the industry itself had no hope of paying for its own bailout, requiring taxpayers to help foot the bill.Learn more about Economics