July 7, 1996

S&L Ruling Recalls Recession Engineered By Congress

When government fouls up, any attempt to fix it makes matters worse. The Supreme Court reminded us of this truism last week by ruling that healthy savings and loan firms who took over failing thrifts in the 1980s may sue the federal government for breach of contract. The problem began with Congressman Fernand St. Germain, D-R.I., chairman of the House Banking Committee.

In 1977, he sneaked through a midnight amendment raising the liability of Federal Savings and Loan Insurance Corporation from $25,000 to $100,000. Fast-buck operators rushed into the savings and loan business. No-risk money spawned high-risk loans. When loan defaults began to pile up, FSLIC panicked. Its reserves covered only about a fifth of deposits affected. The Federal Home Loan Bank Board begged "white knights" to take over some 700 collapsing S&Ls. As bait, acquirers were given a tax credit for "supervisory goodwill."

Then, in 1989, the Democrat-controlled Congress decided S&L rescuers were making too much money through the accounting gimmick. The Senate Banking Committee zipped through the Financial Institutions Reform, Recovery and Enforcement Act nullifying the preference.

This turned 120 mergers from black ink to red. The court holds that the government must honor its contracts -- just as you and I. Thrift industry lawyers estimate their clients will collect $18 billion dollars in damages. The government has already spent at least $200 billion bailing out high flying S&Ls. The final total is expected to reach $350 billion.

The court finding is a postscript to the most disgraceful act of Congress in the 60 years I have reported politics -- deliberate creation of a recession to defeat an otherwise unbeatable opponent. It was the cruelest of all dirty tricks inasmuch as it threw thousands of American's out of work. As planned, the victims rewarded their Brutus.

The thrift problem got worse as the bail-out debt was dumped into the federal deficit already out of control. Simultaneously, the sudden liquidation of S&L real estate securities sent the housing market into a tailspin.

As usual, the Democrat Congress proposed to paper over the debacle by raising income taxes, gasoline taxes, and the minimum wage; and by eliminating deductions on sales taxes and consumer-loan interest. President Bush proposed to keep the economic engine chugging through a cut in taxes on personal savings and capital gains. His suggested bill to lower key economic taxes squeaked through both houses of Congress. Even most Democrats voted for it.

However, Senate Majority Leader George Mitchell smelled blood. Finding a typographical error in the printed bill just approved, he ordered a new printing and a new vote.

Mitchell made a vote against the president a loyalty test for Democrats. "This vote is for me," he declared. A gaggle of Democrats flip flopped. One congressman spelled out what was going on: "For some Democrats, the only goal is to recapture the White House. To this end, they want a weakened president. They want President Bush to fail. A failing economy is not so bad as long as they can blame the president."

Guess what disgruntled Republican said that.

Guess again.

It was Rep. Dan Rostenkowski, Democrat chairman of the House Ways and Means Committee, speaking to an American Trucking Association convention. Nonetheless, Mitchell's dictum prevailed. Surely you remember the horrendous 190-point drop in the stock market the day he killed Bush's tax cut bill. Bush's lips quivered. The hapless president accepted a big tax hike upon Mitchell's word to cut spending by an equal amount. Instead, the resulting budget increased spending.

The sagging real estate market was joined by the automobile and home appliance industries. Then the Gulf War came along, further boosting the federal deficit.

The nation's longest period of economic prosperity -- sparked by President Reagan's modest tax cut -- was over.

With Bush crushed, Mitchell retired. Had he not, he likely would have been impeached by the 1994 GOP Congress.

Eventually, the real estate market soaked up the excess S&L properties. Industry regained profitability by automating and downsizing. The Mitchell-cum-Bush recession began to recover in 1992 -- but too late for the president. Challenger Bill Clinton promised a "middle-class tax cut." No matter that the cut turned into the largest tax increase in history. His intentions were said to have been noble.

Today, the economy limps along in a disappointing 2-percent growth bracket. Unemployment coasts in the respectable 5-percent range -- though at a lower pay-level than formerly. Clinton's first, Democrat Congress lowered the annual budget deficit somewhat by refinancing part of the national debt at a higher interest rate -- and by including the Social Security trust fund as part of the general budget.

"Accounting gimmicks," you say?

Where ever did you get that idea?

PARTING SHOTS

Said Ronald Reagan in 1980: "Recession is when your neighbor loses his job. Depression is when you lose yours. Recovery is when Jimmy Carter loses his."

* * *

Clinton accuses Dole of having accepted more tobacco money than he has. Dole admits this, but swears he didn't inhale.

* * *

The Democratic National Committee sends a trickster, dressed as a cigarette, to heckle Dole. This will end when audiences learn to Bic the butt.

* * *

Not so long ago, Vice-president Al Gore was a major grower of tobacco in Tennessee. He was addicted to money.

By Lindsey Williams, columnist for Sun Coast Media Group newspapers