O.K. Let's play a game. It's called "Deposit Insurance," and it's wild. You get to be the FSLIC, and you start out with almost all the money in the game. But that changes. I get to be the S&L. I wear white shoes and big, gaudy silver belt buckles and hang out with the president's kids. And whatever I spend, you cover. If I shop 'til I drop at the mall? You cover it. Go on a two-week drunk in Bermuda? You cover. A little high-stakes real-estate bingo goes south? Covered.
Well, I may have a little trouble getting you to play this game with me, but the punch line is: You already did. Have fun? Great. Now we need to cover that $500 billion. No kidding. And thanks for being such a good sport.
There was never any real gamesmanship to this competition, overmatched as you taxpayers were. Oh sure, eggheaded economists at the Fed were writing nasty things about "unfunded liabilities" and "moral hazards" and "socialization of risk" back in the early '80s…but who wants to hang with those fuddy-duddies?
You've got to admit that the guys in the white shoes had a field day. In 1980 Congress raised the per-account limits for federal deposit insurance from $40,000 to $100,000 and dramatically increased the range of stores in which the S&Ls could shop. By the mid-'80s, the S&L sector was the financial equivalent of "Supermarket Sweep." The congressional leadership knew a party when it saw one, and it instantly forged its own invite.
Jim Wright, Tony Coelho, Fernand St Germain, Alan Cranston, Donald Riegle, and a squad of lesser stars essentially tried out as S&L blocking backs. There was this very technical rule in the game that if the S&L overspent it was supposed to be constrained before the Deposit Insurance was activated. But the regulators were your basic bureaucratic nobodies whom powerful congressmen enjoyed crushing like little bugs—if properly motivated. Guys in white shoes bearing PAC money can really get congressmen up for the Big Crush.
The so-called Keating Five go down, on what passes for congressional ethics, in two parts: Alan Cranston (bad, bad Alan—good thing you're not running for re-election and, my God, you even look like a scapegoat) and the rest (you guys ought to be a little more careful about appearances). Yet it's always fun to see the bad guys squirm, particularly when they happen to be sanctimonious, self-promoting frauds. Hence Dennis DeConcini's Senate testimony that, when he met Mother Teresa, the first words out of her mouth were, "How's my good friend Charles Keating?" will be featured prominently in the highlight film of this great game.
Cranston's pathetic fall echoes thunderously. Since he's a famous Hollywood Liberal, kissy-face with Morgan Fairchild and the Hollywood Caring, his m.o. as a fixer for the rich & powerful is just slightly embarrassing. To trade political influence for a little extra political cash ($1 million is peanuts to a California liberal) is so distastefully yuppie-Republican that Cranston still can't believe he did it. Hence a truly amusing stream of denials by the senior senator from California, who, in private, was literally begging to do favors for the Lincoln Savings scamsters ("if you need a little grease, go see Al") while cadging megafunds on the very same letterhead.
Cranston's defense is that he was simply engaged in the business of politics: constituent service. Congressmen and women help people. And they raise campaign money. It's perfectly legal so long as no one ever makes the linkage explicit. Decency in high public office is a grammatical question. Legal: "Did those regulators shape up after I came down on them? Oh, by the way, I'm having a big fundraiser Tuesday." Illegal: "Did those regulators shape up after I came down on them because you bought tickets to the fundraiser I'm having Tuesday?" According to Cranston, the only difference between graft and democratic representation is punctuation.
Many cynics have long held this view, and they're thrilled that someone with Cranston's inside information would back their interpretation. But the true fascination concerns the way in which ideological spin controllers have painted the S&L crisis as borne of "deregulation." The game outlined above has been brushed with the "Reagan free market" smear by many pundits, who quote each other as proof of the fiction.
The fact that Carter-era rule changes kicked the process into motion is unexplored, as are the previous anti-consumer regulations limiting S&L risk taking, which essentially worked by robbing depositors of billions in interest. At the bottom of this scandal is the government subsidization of deposit insurance—socialization of risk, just as the econonerds warned.
Even front-page headlines in the New York Times make this ignominious episode, and its antidote, abundantly clear: "Reforms in Banking Call For a Shrinking U.S. Role." The fiscal hemorrhage from the gaping S&L hole has opened up some remarkably clear thinking. The emerging common ground in reform proposals, reports the Times, is this: "The nation's 12,926 commercial banks should move into a second phase of deregulation, one in which the Government's role as a savior of failing banks through deposit insurance would shrink."
We've just been put through a $500-billion remedial econ course—a bit pricey, perhaps, but at least we passed.
Thomas W. Hazlett teaches economics and public policy at the University of California, Davis. This year he is a visiting scholar at Columbia University.