The savings and loan crisis is one of the more extraordinary developments in contemporary domestic affairs. It represents both public and private policy failures of major proportions, imposes costs on the public of between $100 and $500 billion, and creates exceptional new public management responsibilities. The Resolution Trust Corporation, created to “resolve” this crisis, is now the largest real estate agency in the nation, and, remarkably, the country's largest single employer of lawyers.

This disaster has left the public angry and mystified: What is a savings and loan (also called a thrift) and how is it different from a bank? What is FSLIC, and why did we have it if it couldn't prevent the trouble? Why does fixing the problem cost so much, and where does all the money go? Whose fault was it? Does this portend the collapse of the entire financial system?

Some reasons for the crisis are simple to see. Policy designed in the 1930s to create new financing opportunities for home mortgages was flawed and allowed to outlive its time. Thrifts were designed on the popular principle of local banks raising local funds to help local homeowners, and given a protected market. In their time, the thrifts created financing for housing where none existed before. Their capacity to do this was sustained by regulatory controls, tax policies, interest rate controls, and deposit insurance. But when interest rates rose in the 1970s, no amount of tinkering with the original scheme could protect an industry locked into long-term loans earning low rates, and paying out high rates to compete for new funds, and the thrifts could not survive.