An Immodest Proposal for Saving the U.S. Savings-and-Loan Industry

If Voltaire or George Bernard Shaw were around today, either sage would have complained that we live in an age when what is seriously helpful sounds funny, but what is accepted wisdom is downright ridiculous.

So suppose a third of the country’s savings-and-loan firms go bust. And the latest jump in interest rates breaks another batch. Need that mean we’re down to a smorgasbord of poison pills, wipeouts for depositors, a black-eye for government deposit insurance, a bailout by Washington, a sandbagging for taxpayers plus no place to go for popular-sized mortgage loans in a spreading slump ? Doesn’t a real estate slump deepened by bank failures always spread?

‘Taint necessarily so. The savings-and-loan industry crisis, though desperate, is not serious, as the old European saying goes. Alternatives are open to us, and they are by no means limited to new highs for the discomfort index we suffer and new lows for the government incompetence we tolerate.

One quick, easy alternative would save billions without costing a cent, would engineer a soft, safe landing for S&Ls; without the agony of trying to save them ourselves. As fast as S&Ls; go bad, we can hand them over to Japanese banks operating in this country.

This giveaway could very well change our luck. It would also mark another long-term plus for the Japanese banks, and for the entire tightknit Japanese financial power-structure. For the privilege of picking up the tab run up by S&Ls; gone and going bad, the Japanese banks operating in the United States would pick up the most valuable single option on the next U.S. boom. When it starts, today’s biggest losers will emerge as biggest winners for owners rich enough to carry them for the duration.

Until then, ownership in our busted S&Ls; will arouse the Japanese banks and their clients at home to a keen new interest in prospering with us, not just from us. The bigger the S&L; bailout we invite the Japanese banks to pay for, the keener this interest will be.

Meanwhile, U.S. difficulties are giving our rich Japanese trading partners a trillion-dollar headache--the size of their overall U.S. investments plus their U.S. sales. True, everything won’t go bad overnight if the paralysis of the S&Ls; is allowed to spread, first to the U.S. real estate market and then across the entire economy. But the Japanese will start to feel a lot worse about their astronomic stake in our prosperity.

Now suppose the cash cost to the Treasury--not counting income taxes lost or refunded--of paying out S&L; depositors in 1989 and 1990 came to $100 billion. On investment risks measured by a trillion, a charge of $100 billion, spread out over two years, would hardly be out of line for the cost of insurance.

As matters stand, the Japanese banks have a king’s ransom at stake in the United States, and the only insurance they carry on it is our ability to manage--a bad bet, advertised by their own success story in the United States. Therefore, they should be not only ready, but anxious, to learn that we have figured out how to start doing better for ourselves. Altogether, considering the alternative, a two-year cost of $100 billion to the Japanese banks in America would work out as a bargain for insuring their stake in America. It’s an offer the powers that be in Tokyo would not dare to refuse.

When President-elect Bush made his “no new taxes” promise, he was taking credit for the Reagan years. While concern over the spread of S&L; failures was on the rise during the campaign, Bush managers displayed virtuoso professionalism in distracting the rhetoric away from exploring the full-fledged crisis ahead of us; the Dukakis campaign, meanwhile, was correspondingly amateurish in ignoring it. But innocence will be no defense; once in the Oval Office, George Bush cannot plausibly plead not guilty to knowledge of the S&L; mess.

Prosperity can’t run uphill when the real-estate business--the biggest in the country, the one the economy needs to hum everywhere--is running downhill. The country was overbuilt and the banks were overborrowed on mortgages, before the S&Ls; went bad. The S&Ls; started to go bad before interest rates went up and sped up the damage.

Wall Street is peddling the proposition that interest rates are going up some more and, therefore, that the economy is strengthening. Main Street knows better. The citizen in the street may be too naive to know about the debts incurred in takeover deals, but that citizen is common-sensical enough to realize there’s too much bad debt around to permit interest rates to fall or the economy to rise.

If Treasury picks up the tab for the S&Ls;, bailout will jump the deficit. A deficit jump will jump tax rates--at the worst possible time--when incomes (adjusted for the higher cost of living) are declining for the 15th consecutive year and just as a suspect business boom is slowing down.

Current platitudes spur us in opposite directions at once, and therefore freeze us into inaction. Earlier this month, the retired chairman of the Federal Reserve Board, Paul A. Volcker, our elder economic statesman, playing to an overflow audience at a congressional committee hearing, first thundered that the heavens would fall unless the government “does something” to cut the budget deficit; then he took a deep breath and declared the sky the limit for the costs of protecting S&L; depositors.

The members of Congress on hand noted the invitation to sit on both horns of the dilemma at the same time. Congress can do anything with a choice of evils but reject them. The course of least resistance is to complain about both, and live with each.

Gainsaying all the loose talk about “globalization” of the economy, America’s thinking about her place in the world economic scheme of things remains stuck in a provincial rut.

The idea lingers that opportunities here are for foreign powers to enjoy while difficulties are for us to endure. But why need we imprison ourselves in the narrow logic of either/or--a still more destructive deficit or another destructive tax increase--when we can save our shrinking markets for our corporations and our top-heavy debt structure for our creditors? To cite Voltaire again--this time on God--if the Japanese banks did not take over, we would have to invent them in order to save our own.