FSLIC fizzles - Federal Savings and Loan Insurance Corp

WITH SOME IRONY, Savings & Loan associations are known as "thrifts." Yet there is no incentive to be thrifty with S&L deposits while a government agency stands ready to bail out deposits of up to $100,000, and probably more. Many thrifts could be charitably described as insolvent, with no prospect of becoming viable. In Texas alone, the S&Ls lost $9 billion in 1988. The Federal Savings & Loan Insurance Corporation, FSLIC (pronounced fizzlick) is committed to repaying depositors if insolvent thrifts fold, but FSLIC is $50 to $100 billion short. Uncle Sam is likely to get stuck with most of this tab very soon, which makes all the fuss over necessarily minor adjustments in the budget look beside the point.

What went wrong? After the rapid disinflation of 1981-82, the prices of oil, farm products, and related real-estate values collapsed. But the Texas thrifts nonetheless tripled their assets from 1982 to 1986 by offering high interest rates on certificates of deposits (CDs). Since the deposits were insured, depositors did not care that the thrifts were acquiring risky assetseverything from empty buildings to junk bonds. Even prudent thrifts can invest in the CDs of a hundred imprudent thrifts, secure in the knowledge that they can collect $100,000 in insurance on each institution that fails.

Any increase in federal spending owing to the insolvent thrifts would be temporary, because there is not an infinite number of thrifts to be closed. Such temporary outlays are legitimately financed by borrowing. Permanent tax increases are not necessary to meet temporary expenses; they would only permanently increase the size of the government, to the detriment of the private sector. Temporary tax increases are equally ill-advised because they would distort the timing of activity, causing a downturn and disappointing revenues while people waited for such surtaxes to be removed. Postponing action until 1994, when Gramm-Rudman targets disappear, would only make the problem worse.

What can be done at this late date is to reform the entire deposit-insurance system in order to limit future losses. Federal Reserve Governor Wayne Angell has proposed that insurance be limited to $100,000 per depositor household, not per bank, and only once in a lifetime. Once bitten, twice shy. Others go further, suggesting that deposit insurance should be private and competitive, since only private insurance companies would have the incentive and expertise to charge lower insurance premiums to prudent lenders.

In addition to limiting or eliminating nationalization of the deposit-insurance business, it is none too early to get the government out of the equally risky business of guaranteed loans. Otherwise, the next unpleasant budgetary surprise may be to find that Uncle Sam has been underwriting billions in loans to Latin America and Eastern Europe. Such hidden debts may well be larger than the visible national debt. Myopic attention to short-term budget issues will prove counterproductive if, as in the past, it leads to continued neglect of these hidden debts.