The Observation Deck

ryan costa wrote:Various officials and consultants and celebrity cable news talkers will make noise about whose fault it is an how. But the bottom line is that irresponsible mortgage loans are encouraged by big business. They're rolled up, converted to bonds, and traded every which way. The top walks away with billions.

http://en.wikipedia.org/wiki/Liar%27s_Poker

http://www.kunstler.com/mags_diary21.html

I guess it could be explained as having been good for the economy. It replaced x-million manufacturing jobs with construction and service industry jobs for 2 or 3 decades.

Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages. The industry accounted for about $330 billion, or 9%, of U.S. mortgages in 2003, up from $35 billion a decade earlier.

The Reaganist-Bush regime deregulated the Savings and Loans, which then got butchered. The right lobbyists made it easier to convert mortgages into bonds.

There is basically a massive housing surplus in America. However, in areas with the surplus there is no "growth". there is no growth because there is no massive construction of new outer rings of housing developments, shopping centers, and massive commute office parks.

Stephen Eisel wrote:

http://www.answers.com/topic/savings-and-loan-crisis

Deregulation and other causes
Although the deregulation of S&Ls gave them many of the capabilities of banks, it did not bring them under the same regulations as banks. First, thrifts could choose to be under either a state or a federal charter. Immediately after deregulation of the federally chartered thrifts, the state-chartered thrifts rushed to become federally chartered, because of the advantages associated with a federal charter. In response, states (notably, California and Texas) changed their regulations so that they would be similar to the federal regulations. States changed their regulations because state regulators were paid by the thrifts they regulated, and they didn't want to lose that money. This is similar to the concept of a race to the bottom[citation needed].

In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1950 $55bn; 1976 $700bn; 1980 $1.2tn) and high interest rates of the early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, the Congress and the Reagan Administration sought to change regulatory rules so S&L's would not have to acknowledge insolvency and the FHLB would not have to close them down.

One of the most important contributors to the problem was deposit brokerage.[citation needed] Deposit brokers, somewhat like stockbrokers, are paid a commission by the customer to find the best certificate of deposit (CD) rates and place their customers' money in those CDs. These CDs, however, are usually short-term $100,000.00 CDs. Previously banks and thrifts could only have five percent of their deposits be brokered deposits; the race to the bottom caused this limit to be lifted. A small one-branch thrift could then attract a large number of deposits simply by offering the highest rate. In order to make money off this expensive money, it had to lend at even higher rates, meaning that it had to make more risky investments. This system was made even more damaging when certain deposit brokers instituted a scam known as "linked financing." In "linked financing" a deposit broker would approach a thrift and say that they would steer a large amount of deposits to that thrift if the thrift would loan certain people money (the people however were paid a fee to apply for the loans and told to give the loan proceeds to the deposit broker). This caused the thrifts to be tricked into taking on bad loans.[neutrality disputed] Michael Milken of Drexel, Burnham and Lambert packaged brokered funds for several savings and loans on the condition that the institutions would invest in the junk bonds of his clients.

Another factor was the efforts of the federal government to wring inflation out of the economy, marked by Paul Volcker's speech of October 6, 1979, with a series of rises in short-term interest. This led to increases in the short-term cost of funding to be higher than the return on portfolios of mortgage loans, a large proportion of which may have been fixed rate mortgages (a problem that is known as an asset-liability mismatch). Zvi Bodie, professor of finance and economics at Boston University School of Management, writing in the St. Louis Federal Reserve Review wrote that "asset-liability mismatch was a principal cause of the Savings and Loan Crisis."[1]