The Macroeconomic Significance of the Savings and Loan Insolvencies

At the time they occurred, the savings and loan insolvencies were considered the worst financial crisis since the Great Depression. Contrary to what was then believed, and in sharp contrast with 2007-09, they in fact had little macroeconomic significance. S&L remediation cost between 2 and 3 percent of GDP, whereas TARP and the conservatorship of Fannie and Freddie actually made money for the U.S. Treasury. But the direct cost of government remediation is largely irrelevant in judging macro significance. What matters is the cumulative output loss associated with and plausibly caused by failing financial institutions. I estimate output losses for 1981-1984, 1991-1998 and 2007-2026 (the latter utilizing forecasts and projections along with actual data through 2015) and, for a final comparison, 1929-41. The losses associated with 2007-09 have been truly disastrous – in the same order of magnitude as the Great Depression. The S&L failures were, in contrast, inconsequential. Macroeconomists and policy makers should reserve the word crisis for financial disturbances that threaten substantial damage to the real economy, and continue efforts ex ante to identify systemically important financial institutions in advance