Abstract

http://ssrn.com/abstract=260535
 
 

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Real Interest Rates and the Savings and Loan Crisis: the Moral Hazard Premium


John B. Shoven


Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Scott Smart


Indiana University - Kelley School of Business - Department of Finance

Joel Waldfogel


University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics

June 1991

NBER Working Paper No. w3754

Abstract:     
Real interest rates rose to historically high levels in 1980 and remained high throughout the decade. Macroeconomists attribute this phenomenon to a combination of tight monetary policy, fiscal deficits, and variable inflation rates. This paper presents preliminary evidence for an additional explanation of high real rates that is related to the decade-long crisis in the savings and loan industry. Deposit insurance, moral hazard, and regulatory forbearance provide the incentives and the means for insolvent thrifts to issue liabilities that compete with Treasury securities in the market for funds. Thus, as the magnitude of the thrift crisis grew during the 1990s, so did pressure on Treasury yields. Even if the effect of the S&L crisis on interest rates is small, the increased cost of financing the public debt adds significantly to the total costs associated with the savings and loan fiasco.

Number of Pages in PDF File: 33

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Date posted: June 28, 2004  

Suggested Citation

Shoven, John B. and Smart, Scott and Waldfogel, Joel, Real Interest Rates and the Savings and Loan Crisis: the Moral Hazard Premium (June 1991). NBER Working Paper No. w3754. Available at SSRN: http://ssrn.com/abstract=260535

Contact Information

John B. Shoven (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-326-5377 (Phone)
650-328-4163 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Scott B. Smart
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Kelley School of Business
Bloomington, IN 47405
United States
812-855-3401 (Phone)
812-855-5875 (Fax)

Joel Waldfogel
University of Minnesota - Twin Cities - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
University of Minnesota - Twin Cities - Department of Economics ( email )
271 19th Avenue South
Minneapolis, MN 55455
United States
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