U.S. v. Japanese Regulatory Responses to the Financial Institution Crises of the 1980s: The Seductive Appeal of the Cover Up

Abstract:     
Economists have dominated U.S. scholarship about the S&L debacle and they have universally viewed the regulatory response as horrific. This paper argues that the conventional economic wisdom is badly flawed. The U.S. regulatory response to the debacle was disastrous – when economists shaped it in the critical years (1982-1983) that produced the debacle and would have produced catastrophic losses had the policies been maintained. The Reagan administration wanted the policies maintained and even expanded. The administration’s goal was to block its own appointee Federal Home Loan Bank Board Chairman Edwin Gray from “reregulating” and “resupervising” the industry. Chairman Gray, and a great deal of luck, combined to block that administration effort.

Mr. Gray’s policies proved extraordinarily successful. They explain why the S&L debacle was contained at a far lower cost that did not harm the overall U.S. economy and resolved far more expeditiously than was the still unresolved Japanese banking crisis of the 1980s that has impaired the Japanese economy for 15 years. This paper explains why the interaction of institutional factors that allowed for far greater regulatory independence in the U.S. and an extraordinary regulator leader allowed the U.S. to avoid a Japanese-style catastrophe.

Number of Pages in PDF File: 23

Keywords: Corporate law, Financial crisis, Financial regulation, Banking, Banking regulation, Securities, Securities regulation, Control fraud, Fraud

JEL Classification: K14, K22, K23, K42, G18, G28, G38

working papers series