IGNORING ECONOMICS IN DEALING WITH THE SAVINGS AND LOAN AND COMMERCIAL BANKING CRISIS
R. DAN BRUMBAUGH
ROBERT E. LITAN
This paper describes how the government has largely ignored economics in its recent attempts to deal with the deterioration of federally insured depository institutions. The most recent example was the Financial Institutions Recovery, Reform, and Enforcement Act (FIRREA) of 1989. Well documented and widely distributed studies have pointed out the decline of commercial banks. However, the FIRREA completely ignored commercial banks. The paper discusses the pervasive regulatory laxity and forbearance that existed toward banks during the 1980s despite the consequences of similar regulatory behavior toward savings and loans. The paper also shows how the FIRREA's major provisions regarding savings and loans ignore economic analyses. The paper discusses the implications of economic analysis for more appropriate government responses to the continuing deterioration of depositories. Copyright 1991 Western Economic Association International.
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