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“problem banks,” up from 901 a year and a half ago. Moreover, several thousand S&Ls, their insurance corporations, which include the Federal Savings the Farm Credit System are in serious crisis. The failure of S&Ls has received the most attention. The national news media picked up on both the closing of 102 S&Ls in Maryland last May and the closing of 71 S&Ls in Ohio just two months before that. The general crisis for S&Ls has reached such proportions that the corporations that insure the value of deposits at state chartered S&Ls have gone bankrupt, forcing state or federal government to step in. Even on the federal level, the Federal Savings and Loan Insurance Corp. has required $3 billion in aid. ALTHOUGH THE MAGNI-TUDE of the present banking crisis is small in comparison with the panic and loss that occurred in the 1930s, the causes and circumstances are similar. Whereas the banking industry was largely unregulated in the early 1930s, the banking industry today is characterized as being recently deregulated. The irony here is that two of the most important features of deregulation, the removal of the ceiling on interest rates paid on deposits of commercial and investment banking important parts of the New Deal bank reform legislation which was passed in the wake of the 1930s crisis. The bank failures of the 1930s were caused by a general price deflation and massive defaults from a depressed farming sector. Today’s crisis is the result of disinflation \(a declining rate of real estate, and oil sectors. There are two basic ways in which banks have failed. The first is related to interest rates: banks fail when the interest cost on their deposits \(money greater than what they earn on their assets \(loans and government bonds, for suffered from this problem as a result of the high interest rates in the late ’70s and early ’80s. The second, and more crucial, is related to default: banks fail when their loans become worthless after their borrowers default. Many of the current outstanding loans to farmers, oil producers and real estate developers either already are or are becoming worthless. Disinflation, considered a victory for Reagan’s economic management, has come at a great cost to farmers, whose selling prices have fallen much further than the cost of their inputs. Many banks have been hit hard by farm loans going into default, and even if they foreclose on the loan, the lower land values leave banks with heavy losses. One of the reasons for the decline in inflation has been the decline and then collapse in oil prices, which has come about independently of Reagan’s managing of the economy. While the initial decline generally eased the pressure on the banking system, the collapse caused serious problems in oil producing states such as Texas, Oklahoma, and Louisiana. Default on oil loans in these states has amounted to an unmitigated disaster. The large bank holding corporations in those states are either in serious trouble or, as in the case of the Oklahoma Bancorporation, survive only through a government bail-out. Another major ’cause of the crisis in the banking industry is the softening in the real estate markets throughout the Sunbelt. High vacancy rates in office buildings and unsold houses and condominiums have led to crippling defaults on real estate loans. In addition, the rising unemployment rate \(9.3 percent rates of mortgage foreclosures. One mitigating factor has been that a large share of farm credit is supplied by the Farm Credit System \(owned partially by the government and the private commercial banks. Thus the full brunt of the farm crisis has not bled into the private banking system. Overspeculation in home and office construction has caused an even larger impact on banks and S&Ls, as loan default rates have increased in recent years. IN THE UNREGULATED banking industry of the 1930s, bank deposits were not insured by the govern ment. When banks failed, depositors lost all or a large portion of their money. The fear of just such a disaster caused runs at otherwise solvent banks, as swift-footed workers rushed to withdraw their money before the bank windows were shut. As the banking crisis of the 1930s grew, more and more people withdrew their money so that the nation’s money supply decreased. This in turn pushed the economy into a deeper recession and caused even more bank failures. Throughout the banking crisis of the 1930s, the Hoover administration did little but insist publicly that it was all the working out of market forces. Though credit was extended to some banks in order to stave off runs, Hoover stuck to his free market principles and offered no structural change. The Roosevelt administration, however, created legislation that successfully stabilized the banking and finance industries. Two major products of this legislation were the creation of the Federal Depositors Insurance Corp. prohibited interest rates to be paid on checking accounts and put a ceiling on interest rates paid on savings accounts. Confidence in the banking system returned after the federal government, through the FDIC, promised to insure the value of bank deposits. Whereas roughly 4,000 banks collapsed in 1933 alone, the FDIC began to insure bank deposits the following year and that number fell to a few dozen. The number of bank failures from 1934 until 1982 remained negligible. This period of bank stability can also be attributed to a generally more stable economy and to the fact that interest rates on checking deposits have remained below those on banks’ assets. Regulation Q enabled the Fed, by tightening credit conditions, to raise the interest paid on banks’ assets while the interest paid on deposits was kept down by law; thus, the profitability of banks could be better maintained by the Fed. Following the implementation of this legislation, the cycle of banking crises, which often touched off deep economic crises, such as in 1873, ceased. During the 1970s, Regulation Q became the target for free-marketers, who argued that the government was cheating consumers by preventing banks from paying them more on deposits and cheating the banks by not allowing them to attract more deposits by offering higher rates. They called this “financial repression.” Despite all the clamor about financial repression, deregulation was ultimately forced upon the Carter administration by the rise of the Eurodollar markets, where multinational banks were outflanking domestic bank regulation by operating “off-shore” \(in markets cenderegulatory legislation was called the Depository Institutions Deregulation and Monetary Control Act and was accompanied through the political process by a rousing laissez-faire fanfare. Today there is no ceiling on the interest rate paid on deposits such as money market accounts, and as a result such deposits comprise the majority of the nation’s checkable deposits. Moreover, as the barrier to investment 14 SEPTEMBER 26, 1986