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GOVERNMENT POLICY BREWED S&L FIASCO

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Throughout the 1980s Democrats and Republicans sought to compete politically by blaming each other for the budget deficit. Democrats blamed "tax cuts for the rich" and Republicans blamed Congress' insatiable appetite for spending.

Since both sides got political mileage out of the deficit, nothing was done about it.Now the two parties are competing by blaming each other for the savings and loan debacle. Republicans blame Democratic members of Congress for being on the take from shady S&L operators, and Democrats blame Republicans for encouraging greed and are demanding a special prosecutor for President Bush's son, Neil.

The House wants to unleash Secret Service agents to root out "S&L kingpins" and senators want life sentences for "S&L crooks" - a punishment seldom inflicted on murderers and violent criminals.

Sen. Howard Metzenbaum, claiming that the deals were too sweet, has expanded the fraud charges to include those who helped to alleviate the crisis by purchasing failed thrifts from the government and putting them back in the black.

But none of the political mudslinging is helping the reputation of the S&L business or doing anything but making the problem worse and raising the cost to the taxpayers. It is time for politicians to stop passing the buck and to tell the truth.

Fraud did not cause the S&L debacle. Government policy brewed the disaster. S&Ls were the victims of inflation in the 1970s and disinflation in the 1980s. Savings and loan associations borrow short and lend long. When inflation broke loose during the 1970s, the value of their fixed-interest-rate mortgages plummeted while the cost of new money rose dramatically. To increase their earnings, S&Ls began investing in riskier real estate ventures than home mortgages and purchased high-yield corporate bonds in lieu of safer treasuries.

With economists predicting that budget deficits would cause higher inflation, these investments seemed safe and reasonable. However, the inflation rate fell and remained low. The real estate boom, based on the expectations of rising prices, collapsed and loans turned sour.

Whiplashed in this way, the S&L industry teetered on the brink of bankruptcy. When it became apparent that the government's insurance fund for depositors was inadequate for the task, the government rushed in with ill-considered legislation to "clean up the industry." The Financial Institutions Reform, Recovery and Enforcement Act, which passed in 1989, cleaned up the industry by closing it down.

In this one fell swoop, the government destroyed the value of S&L charters by raising their costs, reducing their profitability, forcing them to write down their assets and stripping them of advantages that had made them attractive to potential purchasers. By tripling the cost of the S&L bailout, the government turned a crisis into a debacle.

This debacle is having ripple effects in commercial banking, especially in the Northeast, where declining real estate values are affecting the health of banks.

The government is responding to the banks with the same ill-conceived policies that it applied to S&Ls. The banks are being forced to raise their ratio of capital on loans. Better capitalized banks are more healthy, but in practice this policy means more trouble. The easiest way for banks to increase their capital ratios is by curtailing their lending, which puts more downward pressure on the economy - thus compounding the decline in real estate values.

If the government does to the banks what it did to S&Ls, we are headed for a depression.