Savings Institutions Crisis

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SavingsInstitutions Crisis

Institutions

Reasonsfor the crisis

Themajor reason for the crisis is the change of the monetary policy bythe Federal Reserve where it neglected targeting the interest rateand instead decided to target the bank reserves when it was trying tofind ways in which the underlying rate of inflation could be reduced(Gonzalez, 2014).

Anotherreason is the popularity of the money market accounts in the early1980’s that decided to award high-interest rates or those whoinvested with them. This offer made the investors who had investedwith the savings institutions to pull out their money from suchinstitutions and invest with the money market accounts therebydepleting the sources of funds for the savings institutions (Amadeo,2016).

Thelast reason is the decision that the banks made to invest nspeculative real estate and commercial loans in an attempt to ensurethat their capital was raised. The assets increased by 56% but in theyear 1983, 35% 0f them were not profitable while an estimated figureof 9% had been declared bankrupt technically. The banks ran out ofmoney to refund the account holders who had deposits with them. Theinstitutions were not however closed, but they kept on mountinglosses (Dewhirst &amp Rausch, 2007).

Thecrisis of the year 2007 to the current period can be attributed tothe high risk that was attached to the complex financial products ofthe financial institutions. The second reason is the conflicts ofinterest within the savings institutions industry that were notdisclosed. The Wall Street also contributed to the crisis as it theexcess of it was not properly reined. This can be attributed to thefailure of the regulators, the credit agencies, and the market toplay their role appropriately (Havemann, 2016).

References

Amadeo,K. (2016). Savingsand Loans Crisis: Causes, Cost,retrieved fromhttp://useconomy.about.com/od/grossdomesticproduct/p/89_Bank_Crisis.htmon March 30, 2016

Dewhirst,R. E., &amp Rausch, J. D. (2007). Encyclopediaof the United States Congress.New York: Facts on File.

Gonzalez,J. (2014). WhatCaused the Savings and Loan Crisis in the 80s and 90s?Retrieved fromhttps://www.quora.com/What-caused-the-savings-and-loan-crisis-in-the-80s-and-90son March 30, 2016.

Havemann,J. (2016). TheFinancial Crisis of 2008: Year in Review 2008,retrieved fromhttp://www.britannica.com/topic/Financial-Crisis-of-2008-The-1484264on March 30, 2016.