THE NEW DECADE : 1990 1991 : Off To A Rocky Start : 1990 : THE BIG STORIES : Persian Gulf Crisis Was Watershed for Anemic Economy

The 1980s, described by many as the age of greed and excess, died a quick and violent death in 1990.

The roaring ‘80s didn’t last a decade--the stock market crash of ’87 was the first blow. In the first weeks of 1990, it was over. All of a sudden, traditional values proved to be reality. Speculative real estate deals turned out indeed, to be speculative, and junk bonds turned out, indeed, to be junk.

Bankers, builders, and investment bankers had to pay the price. Home prices plunged, while the banking and thrift industries came under greater pressure than at any time since the Great Depression of the 1930s.

Layoffs, which once seemed an occupational hazard only for auto workers in distant Detroit or steel workers in grimy Pittsburgh, suddenly became epidemic in the new bi-coastal downturn. As the stock market plunged and recession set in, the financial services and real estate industries woke up to reality. It was the morning after in America.

The bloated ranks of stockbrokers, bank executives and other service-sector professionals were quickly thinned out. The young men and women who had been making millions learned how to fill out unemployment insurance claim forms.

In the end however, Saddam Hussein turned out to be America’s leading economic policy-maker in 1990. Clearly, the Iraqi invasion of Kuwait on Aug. 2 was the watershed event of the year for the United States, pushing a slow-growing economy over the edge into recession.

Not only did the invasion lead to an immediate surge in oil prices, but it also created an enormous amount of economic uncertainty that led to a rapid erosion of consumer confidence.

Oil prices peaked at $41.15 per barrel and then fell again as Saudi Arabia and other large producing nations increased their output to make up for the oil lost due to the embargo on Iraq and Kuwait.

But Continental Airlines fell anyway. Citing high fuel prices, it filed for Chapter 11 protection on Dec. 3--the second time in seven years. Fortunately, the higher prices did not seem to feed through to the rest of the economy, however, and inflation seemed to be under some control by the end of the year.

But the blow to consumer confidence seemed much harder to repair, especially with more than 400,000 American troops preparing to do battle with Saddam Hussein’s army in the bleak desert of Kuwait.

By December, only the Bush Administration and Federal Reserve Chairman Alan Greenspan were still avoiding the dreaded R word. (Technically, a recession occurs when the gross national product, adjusted for inflation, is negative for two consecutive quarters.) Nonetheless, a recession was here, and most analysts forecast that it would last through the first half of 1991.

Even the Federal Reserve’s belated attempts to jump-start the sagging economy with lower interest rates didn’t seem to be having much impact by the end of the year. The banking system seemed too weak to provide much stimulus by expanding credit. And, after a decade-long shopping binge, fearful consumers were cutting back as well.

Indeed, as 1990 ended, it seemed that the economy was biding time. The recovery would have to wait for a return of certainty, for something to happen--war or peace--in the Persian Gulf.

What follow are snapshots of the major stories of 1990:

The S&L; Crisis

Savings and loans, hurt by high interest rates at the start of the 1980s, benefited from easy accounting rules and industry deregulation through most of the decade. They finally paid the price as a strict 1989 federal law restructured and regulated the industry and tough new rules stripped away the safe and sound veneer of so many thrifts in 1990.

Risky investments allowed under deregulation doomed some thrifts. But fraud played a big role in the downfall of others, according to regulators and the FBI.

Such failures will cost U.S. taxpayers about $500 million immediately. But some experts believe the bailout could eventually cost $1 trillion.

The Real Estate Slump

The mood of the national real estate market was bearish among investors, foreign and domestic. “The three pillars of real estate finance in the late 1980s--bank lending, Japanese investment and the growing interest of U.S. pension funds in property--are crumbling,” said a report by Salomon Bros. real estate analyst David Shulman.

The real estate downturn that gripped major sections of the country--notably the Northeast and Southwest--at the start of 1990 finally spilled over into California. At year-end, the state’s commercial office space market was glutted in most areas, and residential real estate was sagging in sales and construction.

Trouble on Wall Street

Virtually everything that could possibly go wrong in the securities industry did go wrong in 1990.

The industry entered the decade under a cloud. The crash of October, 1987, had been a shock--costing hundreds of workers their jobs--and in 1990, some of its best known players, such as Michael Milken, were indicted and sentenced for various trading violations. Wall Street’s biggest firms continued to be plagued with losses, layoffs and bankruptcy. Then Iraq invaded Kuwait in August and things got even worse. Stock prices fell dramatically; many mergers and public offerings were postponed; trading volume--which generates commission revenue--slowed to a trickle.

Energy Woes

For the oil industry in 1990, all previous events were dwarfed by Iraq’s invasion of Kuwait in August.

Rising crude oil prices fueled rapid hikes in the prices of gasoline, heating oil and jet fuel, upending the nation’s economy and drawing new criticism of price-gouging, despite industry denials. Oil profits were mixed in the third quarter but were expected to finish stronger in the fourth quarter.

Meanwhile, a new federal clean air law raised the prospect that oil companies would have to spend lavishly to upgrade refineries in the next several years.

Government Spending

After years of bickering while the deficit soared, a Republican President and Democratic Congress struck a historic deal to control the flood of fiscal red ink. An ambitious package of spending cuts and tax increases should carve $496.2 billion from the expected deficits over the next five years. Defense spending would be trimmed, and the growth in Medicare outlays would be slowed. On the tax side, the top marginal rate was boosted to 31%, gasoline taxes rose 5 cents a gallon, and the tobacco tax will increase 4 cents a pack next year and another 4 cents in 1993.

If the plan works, the budget deficit will be wiped out by 1995. But a weakening economy, which brings reduced tax revenues and more spending for unemployment benefits, could upset all the calculations. A full fledged recession would balloon the deficit to $300 billion a year.