Aftermath Of The Thrift Crisis: Balancing The Economy'S Books

The thrift crisis has presented the federal government with a cleanup bill of unparalleled magnitude. Estimates of the present‐value cost range from $90 billion to $140 billion. Most observers acknowledge that the economic cost of the crisis already has occurred in the form of lost investment opportunities and a lower capital stock. Fewer acknowledge, however, that full payment of the cost can be made only through a reduction in private sector claims to wealth so as to match the misuse of deposits and soured loans made by thrifts. Some of that reduction has occurred through equity write‐downs in businesses and thrifts, but much of the necessary reduction has yet to occur. The necessary reduction constitutes an increased tax burden. The thrift insolvencies, coupled with deposit insurance and bankruptcy of the Federal Savings and Loan Insurance Corporation (FSLIC), threw the economy's books out of balance: Claims on real assets in the form of insured deposits exceeded the value of assets owned by thrifts and insurance reserves of the FSUC. In the absence of deposit insurance, a write‐down of claims would have occurred through the market mechanism and the bankruptcy courts. In the presence of deposit insurance, the write‐down must be through taxation and the political mechanism. Recently enacted legislation will effect the writedown by spreading the taxation over time through debt finance, relying primarily on future taxes to service the debt. The desirability of debt finance hinges on whether the legislation also will prevent a recurrence of future crises. Critics maintain that prevention must entail reform of deposit insurance.