Creature From Jekyll Island by G. Edward

So the real problem within the savings-and-loan industry is government regulation which has insulated it from the free market and encouraged it to embark upon unsound business practices. As the Wall Street Journal stated on March 10,1992:

If you're going to wreck a business the size of the U.S. Thriftindustry, you need a lot more power than Michael Milken ever had.

You need the power of national political authority, the kind of powerpossessed only by regulators and Congress. Whatever "hold" Milkenor junk bonds may have had on the S&Ls, it was nothing comparedwith the interventions of Congress.

At the time this book went to press, the number of S&Ls that operated during the 1980s had dropped to less than half. As failures, mergers, and conversion into banks continue, the number will decline further. Those that remain fall into two groups: those

"Banking on Government," pp. 24, 25.

Quoted in "Banking on Government," p. 26.

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82 THE CREATURE FROM JEKYLL ISLAND

that have been taken over by the RTC and those that have not. Most of those that remain under private control—and that is a relative term in view of the regulations they endure—are slowly returning to a healthy state as a result of improved profitability, asset quality, and capitalization. The RTC-run organizations, on the other hand, continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off. Losses from this group are adding $6 billion per year to the ultimate cost of bailout.

President Clinton was asking Congress for an additional $45 billion and hinting that this should be the last bailout—but no promises.

The game continues.

CONGRESS IS PARALYZED, WITH GOOD REASON

Congress seems disinterested and paralyzed with inaction. One would normally expect dozens of politicians to be calling for a large-scale investigation of the ongoing disaster, but there is hardly a peep. The reason becomes obvious when one realizes that savings-and-loan associations, banks, and other federally regulated institutions are heavy contributors to the election campaigns of those who write the regulatory laws. A thorough, public investigation would undoubtedly turn up some cozy relationships that the legislators would just as soon keep confidential.

The second reason is that any honest inquiry would soon reveal the shocking truth that Congress itself is the primary cause of the problem. By following the socialist path and presuming to protect or benefit their constituency, they have suspended and violated the natural laws that drive a free-market economy. In so doing, they created a Frankenstein monster they could not control. The more they tried to tame the thing, the more destructive it became. As economist Hans Sennholz has observed:

The real cause of the disaster is the very financial structure that was fashioned by legislators and guided by regulators; they together created a cartel that, like all other monopolistic concoctions, is playing mischief with its victims.1

A CARTEL WITHIN A CARTEL

Sennholz has chosen exactly the right word: cartel.

The savings-and-loan industry, is really a cartel within a cartel. It could not 1. "The Great Banking Scandal," by Hans F. Sennholz, The Freeman, Nov., 1990, p. 405.

HOME, SWEET LOAN

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function without Congress standing by to push unlimited amounts 0f money into it. And Congress could not do that without the banking

cartel called the Federal Reserve System standing by as the

"lender of last resort" to create money out of nothing for Congress to borrow. This comfortable arrangement between political scientists and monetary scientists permits Congress to vote for any scheme it wants, regardless of the cost. If politicians tried to raise that money through taxes, they would be thrown out of office. But being able to "borrow" it from the Federal Reserve System upon demand, allows them to collect it through the hidden mechanism of inflation, and not one voter in a hundred will complain.

The thrifts have become the illegitimate half-breed children of the Creature. And that is why the savings-and-loan story is included in this study.