S&L Quicksand

A RECENT cartoon captures it: The Hubble orbiting telescope reports that it is photographing a ``black hole.'' But rather than fixing on a point in outer space, Hubble's cameras are trained on a gaping pit in the United States labeled ``S&L bailout.'' Indeed, the cost to taxpayers of cleaning up the savings-and-loan mess seems immeasureable. Last week Treasury Secretary Nicholas Brady, testifying on Capitol Hill, doubled his department's previous estimate of the number of thrifts that are likely to fail. As many as 1,000 thrifts - 40 percent of the industry - eventually may have to be seized by the government.

The 30-year cost to the public of this federal rescue could run as high as $500 billion.

Higher interest rates and soft real estate markets are pushing ever more teetering thrifts into insolvency. As they fail, Uncle Sam must dig deeper into his pocket to reimburse insured depositors.

The thrift bailout won't bankrupt the US. Still, it diverts a sizable part of the government's resources from more productive uses - education, housing, infrastructure repair, environmental protection, aid to emerging democracies in Eastern Europe and Latin America. It would be sad if the much anticipated ``peace dividend'' from the end of the cold war were simply consumed by the bailout.

Conventional wisdom says the thrift debacle was a failure of deregulation, thanks to the Reagan administration's passion for laissez-faire, and that future safeguards must include tighter oversight of thrift practices. There's some truth to that assessment, but - unless economic theory has suddenly gone out the window - something's missing.

Regulation can serve important goals like protecting public safety or checking fraud, but it's never been deemed necessary to make business people smart and keep their eyes focused on profitability. Competition does that. Name another industry in which deregulation led to wholesale stupidity.

The problem in the thrift industry wasn't lack of regulation so much as bad regulation: more precisely, a bad mix of regulation and deregulation that utterly muddled normal business incentives and reasoning.

As it seeks to devise remedies, Congress should ponder its own culpability. The lawmakers, with urging from free-spending lobbyists, created an environment that encouraged wild speculation by thrift operators while shielding them, through stepped-up deposit insurance, from any responsibility for their greedy (and sometimes fraudulent) blue-sky craziness.

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