Lessons Not Learned

Joe Nocera, NYT
AUG. 22, 2014

The death of Fernand St Germain last week, at the age of 86, got me thinking about the financial calamity that he was long associated with: the savings and loan crisis of the late 1980s. There are things it could have — and should have — taught us as we spiraled toward the financial crisis less than two decades later.

“Freddie” St Germain was the sort of congressman you don’t see much anymore: the lovable rogue, a backslapping, deal-making legislator who saw nothing particularly wrong with taking advantage of his position to feather his own nest. As The Times pointed out in its obituary, he liked to joke that he didn’t put a period after “St” because he was hardly a saint. Entering Congress in 1961, when he was 32 years old, he steadily climbed the seniority ladder until he was the chairman of the House Committee on Banking, Finance and Urban Affairs in 1981.

It was a terrible time for the nation’s 4,600 or so S.&L.’s. Inflation was raging, and interest rates spiked as high as 21.5 percent. But the interest rate that S.&L.’s could offer their depositors was fixed at 5.25 percent, an amount established by government regulation. As consumers realized that the value of their deposits was being eroded by inflation, they began to move their money to a newfangled financial device being offered by mutual fund companies: the money market fund, which paid competitive rates of interest.

(More here.)