Selected Publications

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 2007-2009, they in fact had little macroeconomic significance. Savings and Loan (S&L) remediation cost between 2 percent and 3 percent of Gross Domestic Product (GDP), whereas the Troubled Asset Relief Program (TARP) and the conservatorships of Fannie and Freddie actually made money for the US 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, 19291941. The losses associated with 2007-2009 have been truly disastrous -in the same order of magnitude as the Great Depression. The S&L failures were, in contrast, inconsequential. Macroeconomists and policymakers should reserve the word crisis for financial disturbances that threaten substantial damage to the real economy, and continue efforts to identify in advance financial institutions which are systemically important (SIFI), and those which are not.

View Paper: The Savings and Loan Insolvencies and the Costs of Financial Crisis