jIMOh
Thinks s/he gets paid by the post
Can someone older than me tell me what the S&L situation in the 1980's was? I know it was something to effect of a banking crunch or credit crunch... not sure what caused it or how government fixed it (if they fixed it at all).
I am looking to use past performance to guess how that applies to current credit crunch with sub prime situation, and devaluing of properties.
I see the current situation in a downward spiral...
consider- a person upside down on a mortgage they cannot afford at a high interest rate, property is decreasing in value, and that makes person upsidedown on it larger.
The bank holding the loan is less likely to get their money, which means the bank cannot make new loans (banks must have cash behind 20% of loan value- meaning 20% of any loan must be on deposit with bank, correct?), so even if rates fall, the person above cannot refinance their loan, and the bank cannot offer other loans (at lower rates) to other customers, because they do not have enough deposits on hand to lend out more money.
That new person which has good credit, lots of money in the bank, and stable income has few good investment options (because lower rates mean savings accounts pay low interest), so they pull money out of banks and invest it somewhere else. Might be overseas, might be to a private business, might end up taking more chances with money than they would otherwise to find a decent return (8%?). If a person takes a chance on something and loses money, GDP just dropped again, causing more problems. In most of these examples for where to invest, the money was removed from the bank, so therefore the bank has less available funds to lend to people which need credit.
A 3 way viscious circle. My fix would be to raise rates, so people and businesses would put more money into banking system, and the pressure on credit industry is then reduced. But I am no economist.
So going back to post title- what was the S&L issue of the 80's about, and is it similar to what is happening now?
I am looking to use past performance to guess how that applies to current credit crunch with sub prime situation, and devaluing of properties.
I see the current situation in a downward spiral...
consider- a person upside down on a mortgage they cannot afford at a high interest rate, property is decreasing in value, and that makes person upsidedown on it larger.
The bank holding the loan is less likely to get their money, which means the bank cannot make new loans (banks must have cash behind 20% of loan value- meaning 20% of any loan must be on deposit with bank, correct?), so even if rates fall, the person above cannot refinance their loan, and the bank cannot offer other loans (at lower rates) to other customers, because they do not have enough deposits on hand to lend out more money.
That new person which has good credit, lots of money in the bank, and stable income has few good investment options (because lower rates mean savings accounts pay low interest), so they pull money out of banks and invest it somewhere else. Might be overseas, might be to a private business, might end up taking more chances with money than they would otherwise to find a decent return (8%?). If a person takes a chance on something and loses money, GDP just dropped again, causing more problems. In most of these examples for where to invest, the money was removed from the bank, so therefore the bank has less available funds to lend to people which need credit.
A 3 way viscious circle. My fix would be to raise rates, so people and businesses would put more money into banking system, and the pressure on credit industry is then reduced. But I am no economist.
So going back to post title- what was the S&L issue of the 80's about, and is it similar to what is happening now?