home > by publication type > op-eds > Tricked Again: How Bad Accounting Triggers Collapse
Email
| Author: | Amity Shlaes, Senior Fellow for Economic History |
|---|
October 9, 2008
Bloomberg.com
Markets recognize desperation when they see it. That's the best analysis of shareholders' reaction to the $700 billion rescue law.
Ripping open the package Treasury Secretary Henry Paulson offered, investors sought reform. Instead they found short-term gimmicks, cash and earmarks. The grab bag means trouble, unaddressed, is still down the road. The markets' conclusion: Might as well get it over with by selling now.
The sell-now attitude may be coming out of the experience of the nation's last great banking crisis, that of the savings and loans. That crisis started in the late 1970s and early 1980s, when interest rates skyrocketed; in 1981 the prime rate passed 21 percent. The thrifts were lending at low rates and had to borrow at high rates. They quickly were rendered insolvent.
Overregulation played a role: the government put a 5.5 percent ceiling on passbook savings accounts. Meanwhile, smart kids were earning much higher rates in money-market mutual funds. Real estate and a bust, then as now, played a role.
At first, policy makers thought they could solve thrifts' challenges merely by allowing them to lend at higher rates. As author Martin Lowy paraphrases in his chronicle of the thrifts' misadventures, "High Rollers,'' the Treasury viewed the trouble thusly: "The problem is basically a liquidity problem caused by interest-rate regulation. If rates are deregulated, the S&Ls will be able to attract funds.'' The emphasis on liquidity, as opposed to solvency, sounds almost Paulson-esque.
To order Task Force reports, Council Special Reports, and Critical Policy Choices, please call, fax, or order online from our distributor, the Brookings Institution Press: phone +1.800.537.5487, fax +1.410.516.6998.
For information on other reports that are not for sale, or for general publications information, please call +1.212.434.9516 or email publications@cfr.org.
Start-Up Nation addresses the trillion-dollar question: How is it that Israel—a country of 7.1 million, only sixty years old, surrounded by enemies— produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada, and the UK? With the insights of geopolitical experts and investors, the authors examine this nation’s adversity-driven culture to answer this question and offer prescriptions for a global economy on the rebound.
In Forces of Fortune, Vali Nasr presents a paradigm-changing revelation that will transform the understanding of the Muslim world at large. He reveals that there is a vital but unseen rising force in the Islamic world—a new business-minded middle class—that is building a vibrant new Muslim world economy and that holds the key to winning the cold war against Iran and extremists.
In Cuba: What Everyone Needs to Know, Julia E. Sweig presents a remarkably accessible portrait of Cuba's unique place on the world stage over the past fifty years, including its internal politics, its often fraught relationship with the United States, and its shifting relationship with the global community.
Complete list of CFR Books
Copyright 2009 by the Council on Foreign Relations. All Rights Reserved.