Current Financial Mess Mimics 1987 Crash

In an attempt to more aggressively pursue profits and stave off declining values, loan institutions have expanded into risky territories. By extending credit to borrowers previously deemed too risky, taking on creative financing arrangements and overall throwing caution to the wind, these companies were able to record immense, impressive profits of proportions even experts considered unattainable.

As the government began to raise interest rates, though, mortgage and loan holders increasingly became unable to make even their minimum payments. Defaults began to become commonplace, and foreclosures proliferated throughout the country. The financial market began to look sour for the previously profitable loan companies, and smaller, weaker institutions either failed or were snatched up by more stable entities. The market was in trouble so deep that only a bailout by the government could solve the lending troubles. As lawmakers contemplated what action to take, the stock market plummeted in one of the worst one-day declines in history.

While the previous two paragraphs may sound like a pretty accurate overview of the current financial crisis, this passage was simply taken (and paraphrased, of course) from an About.com write-up of the Savings and Loan (S&L) bailout of the late 1980s. As the problems plaguing savings and loan institutions mounted, investors began moving their money to other avenues, sparking the "Black Monday" stock market crash in October, 1987.

Although nearly a quarter of Americans are too young to remember the financial events of the late 1980s, the country seems to have returned to the dilemma it faced over two decades ago. Once again, finance companies and banks have taken liberties with credit, overextending in high-risk markets in a bid to increase short-term profits. Once again, these tactics have failed. Once again, the institutions are asking Uncle Sam for a bailout.

The government of the late 1980s found a way to extend a $50 billion in bailout funds to the institutions, though about half of the institutions of the time ultimately failed anyway. A slew of regulations were passed and rolled into a large bill known as the Financial Institution Reform, Recovery and Enforcement Act (FIRREA). Despite the intentions of this act (to require better oversight of financial risks and to create a "bank insurance" fund), it seems to have been largely ineffective.

Now Wall Street firms want to be bailed out again, and the nation's elected officials may be ready with another taxpayer-financed handout. This handout, though, is about fourteen times the size of the FIRREA price tag. The idea of asking for help after a period of extraordinary financial irresponsibility is roughly akin to calling home and saying, "Dad, I wrecked another car. Will you buy me a new one again?" Only, in the case of the bailout, the government isn't taking the money out of its own pocket; it is forcing the bill on every American taxpayer.

As of the time of this article, the path government will choose remains unclear. While another federal bailout seems likely, the proximity of the banking failure to the November general elections may cause some members of congress to more carefully evaluate any possible bailout actions. History has taught us, after all, that a bailout may ultimately do more harm than good.

Sources: http://economics.about.com/od/governmenttheeconomy/a/savings_loan.htm; http://en.wikipedia.org/wiki/Black_Monday_(1987)