Freezing deposits at the beleaguered Community Savings and Loan Association of Bethesda was a mistake. Gov. Harry Hughes was trying to break the momentum of the run on Community, but the state government may find itself paying a high price for only very temporary relief. What he has done, inadvertently, is to warn depositors in other state-insured S&Ls that access to their money is not ensured and that, the next time one of these S&Ls gets into trouble, the depositors will have to move fast to get to their money before the state impounds it. That's the way to ensure bigger and angrier runs in the future.
Gov. Hughes has not really gained much by this freeze. The depositors will have to be paid, whether now or later. The state has already guaranteed it.
If Community were the only state-insured S&L in Maryland, Gov. Hughes's intervention might perhaps be justified. By prohibiting withdrawals for 20 days, he has given Community's management a little time to liquidate some of its assets. That holds down, marginally, the losses to the institution and perhaps to the state fund that insures the depositors.
But Community is not the only state-insured S&L. And there are a lot of people around the state who have money deposited in those S&Ls that they would like very much to take out. The governor's limits on withdrawals from the state-insured institutions, imposed last spring, are still in effect, and still a source of exasperation. This latest action will only aggravate the erosion of confidence in these S&Ls and their insurance generally.
It would be nice to think that Community might be the last S&L to fall into a financial squeeze. Perhaps that will turn out to be the case. But Gov. Hughes and the state government shouldn't count on it. Certainly the depositors won't. The strains on the savings and loan industry in general are well known, and they continue.
That's why the governor needs to work out, in advance, a better strategy for dealing with these crises. The right way to do it is to let the run keep right on running until it runs out. The state has to be prepared to keep delivering cash in Brinks trucks to the offices of any S&L that it has insured, as long as depositors are standing in line waiting for it. That's the only way to prove to people that state insurance is truly reliable -- and it's the only way to end the succession of runs that have afflicted S&Ls in Maryland since last spring. The governor needs to think less about the costs of the Community run, and more about the costs of the next one.