Page 592 - WhyAsInY

Why (as in yaverbaum)
inactions that are close cousins to those that gave us the “Subprime Crisis” in 2006–2008, and, sorry to say, based on what appears to be the stupendous absence of a learning curve in Washington, those that are all too likely to recur in some new form.
[N.B. The remainder of this section is here to provide you with a short edu- cation on the causes of the S&L Crisis in order to answer the question why Congress chose to create legislation to get Harvey Yaverbaum to come to Washington. If you elect to skip it and move to “Baptism by FIRREA,” which follows, I’ll understand, but don’t expect extra credit on the final exam.]
For the moment, we start with the question “What is or was an S&L?” and put aside a peroration concerning the revered (at least in this country) Homo economicus and the worship of how his rationally based selfishness made the wheels of our economy spin so well, which will do you little good and waste a good deal more ink.
Once upon a time, when somebody wished to borrow money to pur- chase a home, the local S&L, which is short for “savings and loan,” would make the loan and take a mortgage on the home as its security. Home mortgages typically secured loans that were repayable over a lengthy period of time (as much as thirty years) at an interest rate that was fixed at the inception of the borrowing and never changed, and much of the money that was lent came from the receipt by the S&L of mortgage principal and interest payments as well as from deposits that were attracted to the S&L by the payment of interest on savings accounts.
So, essentially, the S&L (which was also referred to as a “thrift”) would make its money by charging (and receiving) more interest on its mortgage loans than it paid on its deposits.
But a savings depositor was entitled to remove his or her money from the S&L essentially whenever he or she wished to. Accordingly, to attract and keep money on deposit, an S&L would raise the interest rates on savings accounts as it judged necessary.
Now, that’s all well and good, but what happens when competition forces institutions to pay out more in interest than they were taking in?
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