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Preface to minisymposium on drawing the right lessons from the S&L mess
The QuarterlyReviewof Economics and Finance,Vol. 36, No. 3, Fall, 1996, pages 269-270 Copright 0 1996 Trustees of the Universityof Illinois All rightsof reproductionin any form reserved. ISSN 00335797
FOCUS
Preface to Minisymposium on Drawing the Right Lessons from the S&L Mess EDWARD J. KANE Boston College
According to the Theory of Rational Expectations, taxpayers and uninsured depositors should have tracked changes in the danger to which insolvent S&Ls exposed their wealth. In the first paper of this symposium, Goldberg and Hudgins show that uninsured depositors responded far more quickly and effectively to evidence of S&L weakness than taxpayers did. Taxpayer sluggishness had two roots. One is wishful thinking. Human beings have a hearty appetite for comforting delusions. Taxpayers desperately wanted to believe industry and regulator disinformation about the irrelevance of the industry’s opportunity losses. The second is the free-rider problem. It was prohibitively costly for individual taxpayers to collect and disseminate relevant information and to organize a coalition strong enough to overcome industry lobbying pressure. Before, during, and after taxpayers mammoth tax bill surfaced, officials deftly manipulated public opinion with a succession of half-true assurances about S&L insolvencies. The first half-truth was the long-running, but suddenly falsified claim that taxpayers had “never lost a nickel” in the Federal Savings and Loan Insurance Corporation (FSLIC). Successor half-truths heaped the blame for accumulated taxpayer losses on bad S&L managers, bad economic luck and bad tax policies, and not at all on self-serving government regulation that left taxpayers responsible for covering the losing side of positively skewed, negative-expected-value bets insolvent institutions were actually encouraged to place. Ex-government officials still ask us to believe that there was nothing better they could have done. They allege that depositor discipline could not be relied on to identify zombie institutions and that the clean-up was well-managed. To enhance the credence of the claim that conscientious regulators held taxpayer damage to a minimum, the opportunity costs of FSLIC forbearance and of the subsequent clean-up have been systematically under-reported in official records. In this symposium, the ways in which officials have mismeasured the costs of forbearance and clean-up are explained by Kane and Yu and by Ely and Varaiya, respectively. 269
270
QUARTERLY REVIEW OF ECONOMICS AND FINANCE
Taken together, these three symposium papers emphasize the importance taxpayers of making officials accountable
to
after the fact for having mis-represented
and mis-served taxpayer interests. Much as Soviet officials “jammed” Western radio signals that they didn’t want their citizens to receive during the cold war, U.S. officials jammed and distorted economic signals about the costs of deposit-insurance
misman-
agement. As time passes, it becomes harder and harder to keep this disheartening lesson alive.
FOCUS
Preface to Minisymposium on Drawing the Right Lessons from the S&L Mess EDWARD J. KANE Boston College
According to the Theory of Rational Expectations, taxpayers and uninsured depositors should have tracked changes in the danger to which insolvent S&Ls exposed their wealth. In the first paper of this symposium, Goldberg and Hudgins show that uninsured depositors responded far more quickly and effectively to evidence of S&L weakness than taxpayers did. Taxpayer sluggishness had two roots. One is wishful thinking. Human beings have a hearty appetite for comforting delusions. Taxpayers desperately wanted to believe industry and regulator disinformation about the irrelevance of the industry’s opportunity losses. The second is the free-rider problem. It was prohibitively costly for individual taxpayers to collect and disseminate relevant information and to organize a coalition strong enough to overcome industry lobbying pressure. Before, during, and after taxpayers mammoth tax bill surfaced, officials deftly manipulated public opinion with a succession of half-true assurances about S&L insolvencies. The first half-truth was the long-running, but suddenly falsified claim that taxpayers had “never lost a nickel” in the Federal Savings and Loan Insurance Corporation (FSLIC). Successor half-truths heaped the blame for accumulated taxpayer losses on bad S&L managers, bad economic luck and bad tax policies, and not at all on self-serving government regulation that left taxpayers responsible for covering the losing side of positively skewed, negative-expected-value bets insolvent institutions were actually encouraged to place. Ex-government officials still ask us to believe that there was nothing better they could have done. They allege that depositor discipline could not be relied on to identify zombie institutions and that the clean-up was well-managed. To enhance the credence of the claim that conscientious regulators held taxpayer damage to a minimum, the opportunity costs of FSLIC forbearance and of the subsequent clean-up have been systematically under-reported in official records. In this symposium, the ways in which officials have mismeasured the costs of forbearance and clean-up are explained by Kane and Yu and by Ely and Varaiya, respectively. 269
270
QUARTERLY REVIEW OF ECONOMICS AND FINANCE
Taken together, these three symposium papers emphasize the importance taxpayers of making officials accountable
to
after the fact for having mis-represented
and mis-served taxpayer interests. Much as Soviet officials “jammed” Western radio signals that they didn’t want their citizens to receive during the cold war, U.S. officials jammed and distorted economic signals about the costs of deposit-insurance
misman-
agement. As time passes, it becomes harder and harder to keep this disheartening lesson alive.