Financial "Rescue" or "Bailout": Language Does Matter in Financial Crises: Part 3: Great Depression to 2008
The Great Depression
Marking the prolonged period of economic decline and stagnation that followed in the wake of the stock market crash of 1929, the Great Depression not only spread over the U.S., but in the early 1930s, became worldwide.
Moreover, despite optimistic statements made by President Hoover and his secretary of the treasury Andrew W. Mellon that business was “fundamentally sound” and a new era of prosperity was on the horizon, factories closed, unemployment rose, banks closed and commodity prices steadily fell.
By 1933, four years after the infamous stock-market crash of 1929, the national unemployment rate was nearing 25 percent, and about 1,000 American homeowners a day were losing their houses to the bank.
Newly elected President Franklin Delano Roosevelt and the Congress created the Home Owners' Loan Corp to prevent foreclosures by buying defaulted mortgages from banks and then refinancing them at lower fixed 15-year terms. The agency was swamped with 1.9 million requests, with half the applicants having had monthly incomes of between $50 and $150.
And with the depression having negatively affected nearly every sector of the economy, several federal ‘initiatives ’ vs. ‘bailouts’ provided the money and government support needed to create tens of thousands of new jobs—principally in public works.
America’s newly re-employed workers numbered in the millions and slowly began purchasing again, easing the economy back to vitality.
Finally with steady incomes, the re-employed millions began purchasing again and the economy began to lurch forward in fits and starts, but it was not back to previous levels of vitality for a longer time.
The Savings and Loan Crisis
Savings-and-loan associations were once longstanding institutions that concentrated on home loans and lured savings-account depositors with gift premiums like blankets, toasters, and coffee pots. Nevertheless, during the 1980s, fueled by deregulation and poor regulation, the S&L industry wildly expanded into commercial real estate lending.
At first, as the S&Ls made more money on their loans than they had to pay for deposits, the business model was viable, but when interest rates rose, the model broke and the institutions failed.
From 1986 through 1995, 3,234 S&Ls (about half) in the U.S. closed, leaving federal insurers stuck with tens of billions of dollars in bad loans. Following eight months of Congressional debates, in 1989 the Resolution Trust Corp. was created to make depositors whole, investigate allegations of wrongdoing, and deal with what remained of the S&L industry. Skeptics warned that the Resolution Trust Corp. (RTC) would be saddled with bad assets for generations to come.
Indeed, the government ended up owning shopping centers, homes and resorts, as well as an odd mix of assets put up as collateral—which included Picasso and Warhol paintings, a 30-horse merry-go-round, a Colonial-era whiskey distillery, and a drawstring made from Martha Washington's gown.
Finally, in 1989, President George Bush and Congress agreed on a taxpayer-financed bailout measure known as the Financial Institutions Reform, Recovery Enforcement Act (FIRREA). According to the Federal Deposit Insurance Corporation (FDIC) research, by the time the S&L cleanup was over it had cost U.S. taxpayers about $124 billion in non-inflation-adjusted dollars.
The prevailing language of the S&L crises was swathed in allegations of ‘fraud’ and ‘improper conduct.’ And five U.S. Senators, known as the Keating Five, were ultimately investigated by the Senate Ethics Committee for having accepted $1.5 million in campaign contributions from Charles Keating, the head of the Lincoln Saving and Loan Association.
For further study of The S&L Crises, see the following The S&L Crises: A Chrono-Bibliography posted at the FDIC site.
The Financial Crisis of 2008
Seeded by sub-prime investment products, high oil and food prices, substantial consumer and commercial credit crises, increasing unemployment, and the possibility of a global recession, the language of the economic crises of 2008 was fluid, and it unfolded in nearly every corner of the world.
For a closer analysis of the language of the financial crises of 2008, specific to the U.S., see the September 29, 2008 New York Times article by Brian Stelter entitled President Bush Calls It a 'Rescue.' but Others are Sticking with 'Bailout.' The Wall Street Journal has since stated that it will avoid the use of words like “pandemonium” and “apocalypse.”
And then there is the Big Mac Index concocted in 1986 by The Economist, and discussed as to its relevance to the U.S. 2008 financial crises by Anthony Landry, from the Federal Reserve Bank of Dallas in The Big Mac: A Global-to-Local Look at Pricing.
Also weighing in on the current crisis of 2008 at a recent Congressional subcommittee hearing is former fed chairman, Alan Greenspan, whose tenure included the rise of sub-prime mortgages, the housing bubble, predatory lending, exotic financial instruments and derivatives, credit default swaps, irrational exuberance, and repeated reduction in the discount rate and targeted fed funds in 2001-2003. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
No matter the language, consumers around the world welcomed much needed economic relief over the next several years, although it businesses continued to close as the government stated the economy was on the mend.