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June 28, 1991
Mortgage rates improved this week despite more news indicating an economic recovery. Falling commodity prices are keeping a lid on rates for the time being.
In a report his morning, Leading Economic Indicators rose .8%, the fourth straight monthly rise.
Durable Goods Orders jumped a healthy 3.8% in May, and Consumer Confidence in June rebounded to 78% from 76.4% in May. The First Quarter Gross National Product was rerevised (for the last time) to a 2.8% decline the same as in the initial report.
It was hard to open a newspaper this week without running into a story about bank and S&L trouble.
Wells Fargo announced big, new loan loss reserves; the RTC is going to "reorganize;" the General Accounting Office says bank losses are understated; and the FDIC finally acknowledged that it will be broke by the end of 1992.
Is all this financial trouble linked in some way? Some say it's because all bankers are dumb, or because there isn't enough regulation, or too loose enforcement. Wall Street says the it's the burst of a real estate bubble. You can even find a nitwit quorum that thinks the CIA did the whole thing.
There is one common thread back to the beginning of bank and S&L losses, but it's none of the above. The good news is that the common cause had a much more expensive impact on S&Ls than on banks.
The legit thread is interest rate deregulation. It happened from 197880, and nearly everybody thought it was a good idea: the Fed, the bankers, even consumers. Prior to that time, the interest rate your bank could pay you was limited by the Federal Government.
Are you old enough to remember when banks would not pay interest on your checking account? When there was no such thing a checkable money market fund?
Banking is a spread business. Until 1980, a typical bank had a 5% spread between deposit cost and loan earnings. Now, spreads may be only half that.
The spreads are so poor that traditional banking just isn't a good business anymore. In order to earn decent spreads, banks have to take risks which they never would have before risks which most still will not take.
Poor spreads at banks is a slow death, not the borrowshortlendlong crater at the S&Ls. There is a good chance that commercial banks as we have known them will gradually disappear, or be transformed entirely. This transition will have its awkward moments, but nothing like the RTC cost.
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