NOW THAT the Bush administration and Congress have begun to acknowledge the full dimensions of the S&L disaster, it's reasonable to ask how to prevent a repetition. The failures and frauds that will now cost the taxpayers some hundreds of billions of dollars are of more than historical interest. How can the country assure itself that public money will never again be needed to rescue the federal deposit insurance system?
One current idea -- radical and flat wrong -- proposes to abolish deposit insurance altogether or to limit it only to part of the deposit. The thought is that more risk would make depositors more careful where they put their money. In fact, depositors are in no position to know the condition of their S&Ls or banks. Cutting insurance coverage even to, say, 90 percent of the deposit is a formula for instability, with rumors driving runs on banks. There are better ways to eliminate the threat to the taxpayer.
It's time, first of all, to abolish S&Ls. The traditional S&L can't survive in a world in which interest rates yo-yo up and down. Banks can protect themselves by matching the maturity of their deposits with those of their loans. An S&L can't do that because the law requires it to put most of its money into housing.
But the law also says that any S&L failing to get the required percentage of its loans into housing by next August will be treated as a national bank. That's exactly right. The solution is to turn the strong S&Ls into banks. As for the rest, the regulators have a duty to put them out of business. Will home buyers suffer a shortage of mortgage money? There's no evidence whatever of it.
Next, capital requirements deserve continuing attention. When a bank or an S&L loses money, the losses are paid out of capital. They hit the federal deposit insurance fund only when the capital is all gone. That's what happened in hundreds of S&Ls, and that's why their losses now burden the taxpayer. Capital requirements for both S&Ls and banks are now being raised. But perhaps they ought to be raised still higher. Banking has been getting riskier over the past decade, and the adequacy of the capital rules needs to be examined continuously by the Treasury and the congressional banking committees.
In return for the enormous amounts of money that the S&L collapse will cost, the public is entitled to several things: a sounder financial system, tighter enforcement of the regulations and vigorous prosecution of the swindlers. Can the Bush administration and Congress deliver? We'll see.