The Macroeconomic Significance of the Savings and Loan Insolvencies

Research in Economic History, 2017, Forthcoming

79 Pages Posted: 24 Mar 2013 Last revised: 19 Nov 2016

See all articles by Alexander J. Field

Alexander J. Field

Santa Clara University - Leavey School of Business - Economics Department

Date Written: December 1, 2014

Abstract

At the time they occurred, the savings and loan insolvencies were considered the worst financial crisis since the Great Depression. Contrary to what was then believed, and in sharp contrast with 2007-09, they in fact had little macroeconomic significance. S&L remediation cost between 2 and 3 percent of GDP, whereas TARP and the conservatorship of Fannie and Freddie actually made money for the U.S. Treasury. But the direct cost of government remediation is largely irrelevant in judging macro significance. What matters is the cumulative output loss associated with and plausibly caused by failing financial institutions. I estimate output losses for 1981-1984, 1991-1998 and 2007-2026 (the latter utilizing forecasts and projections along with actual data through 2015) and, for a final comparison, 1929-41. The losses associated with 2007-09 have been truly disastrous – in the same order of magnitude as the Great Depression. The S&L failures were, in contrast, inconsequential. Macroeconomists and policy makers should reserve the word crisis for financial disturbances that threaten substantial damage to the real economy, and continue efforts ex ante to identify systemically important financial institutions in advance.

Keywords: Financial Crisis, Savings and Loan, Output Gap, Potential Output, Recessions

JEL Classification: E32, E44, G21

Suggested Citation

Field, Alexander J., The Macroeconomic Significance of the Savings and Loan Insolvencies (December 1, 2014). Research in Economic History, 2017, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2238172 or http://dx.doi.org/10.2139/ssrn.2238172

Alexander J. Field (Contact Author)

Santa Clara University - Leavey School of Business - Economics Department ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
408 554 4348 (Phone)
408 554 2331 (Fax)

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