Free-wheeling capitalism has always been the heart of the US Economy but the recent $700 billion bailout, a level of government intervention not seen since the Great Depression, is hardly unprecedented. Historically, the Feds have not only taken stakes in banks, steel mills, and coal mines but have even seized control of everything from railways to savings and loans.
To get some perspective on our current financial crisis, it’s helpful to look back at some earlier bailouts since the Depression leading up to the drastic moves of late.
Entire industries once considered the backbone of our economy can sometimes disappear as a result of changing technology. During World War I, the government nationalized railroads saying they represented vital supply lines. In the 1970s, the railroads were nearly threatened out of existence by the recent popularity of air travel. The government-owned National Railroad Passenger Corp., better known as Amtrak was created in 1971 and is still reliant on taxpayer money today. Conrail was created in 1976 as a merger of Penn Central (which declared bankruptcy in 1970) and a half-dozen other bankrupt railroads. Conrail fared better than Amtrak, even managing to turn a profit by the mid-1980s and eventually going public.
The Emergency Loan Guarantee Act, passed in August, 1971 was explicitly directed at shoring up American business enterprises. Its first beneficiary was the aerospace firm Lockheed, a major government contractor, which received a mind-blowing $1.4 billion. As in earlier times, Lockheed’s status as a defense contractor played a major role in the bailout.
United States National Savings Bank/Franklin National Bank
The first major bank to fail in the US since the FDIC was established was United States National Savings Bank, worth $1.5 billion. Shortly thereafter, on October 8, 1974, the Franklin National Bank in New York also failed. At the time, it was the largest bank failure in US history, and Michele Sindona, the mafia-connected member with a controlling interest in the bank, eventually went to prison and died of cyanide poisoning. The Feds assumed the debts in those cases, and proceeded with a bailout that was simply unthinkable at the time, the equivalent of $7.7 billion by current standards.
As in today’s mortgage crisis, Chrysler’s downfall was the result of major hubris on the part of its executives but was also blamed on the increasing popularity of cheap Japanese automobiles coming into the US market. Chrysler lost $1.1 billion in 1979, a loss which many feared would ripple through the entire US automotive industry. The Feds stepped in almost immediately, passing the Chrysler Loan Guarantee Act in 1980 which provided $1.5 billion in loans to Chrysler, one of the largest payouts ever made to a single corporation.
Continental Illinois National Bank and Trust
1980 starts a decade of intense bank failures; the FDIC reports that 1,600 were either closed or received financial assistance from 1980 to 1994. Many of the same questions got asked as get asked today. How much oversight is necessary? And how deftly can we actually assess risk? Continental Illinois National Bank and Trust was once the seventh-largest bank in the US but fell on bad times due, in part, to bad loans for oil producers and investors in the Oklahoma and Texas oil boom of the late 1970s and early 1980s. As the bank was heading for failure, large depositors withdrew over $10 billion of deposits in early May, 1984. The bank was seized by the US government that year, which remained in control until 10 years later when it was acquired by what is now Bank of America, a beneficiary of the current bailout. A few nay-sayers called this one, “Continental’s lending style might be overly aggressive,” one man hauntingly points out in an FDIC report. Not unlike the failures that were a result of the recent mortgage crisis, the bank’s downfall could be directly traced to risk taking and a lack of due diligence on the part of bank officers.
Less Developed Country Debt Crisis
The LDS Debt crisis was the result of international banks and monetary funds expanding too fast in an attempt to keep pace with the emerging global village in the late 1970s and early 1980s. As development became a driving goal and traditional banking borders were removed, less advantaged countries took advantage of this bank roll. By 1978, Latin America owed international banks a boggling $159 billion. By 1982, $327 billion was outstanding. Experts did protest about the risk and volatility. Imploring warning letters were sent. But it wasn’t until the recession in the 1980s that international banks looked hard at their holdings. By 1982, 40 nations could not foot the bill. The Feds kept the American banking market out of it in the end, and a global recession was narrowly avoided.
What we’ve learned
Is history doomed to repeat itself. Is the US economy doomed to suffer an endless cycle of ups and downs that will forever require the hand of government intervention? Are government bailouts, as some have recently said, akin to socialism?
There are no easy answers to these questions but after the lessons of the 1980s, the Feds have acquired some common wisdom about when banks fail (if not always why). Whenever there’s a period of rapid growth there’s a tendency for both lenders and investors to get too cocky and take on far more risk than they should. Today, there are number of industries on the verge of collapse, including the airline and automotive industries. Should the government step in?
The good news here is that, in almost every case, these course corrections have proved temporary and most finance experts believe they have been both necessary and beneficial in times of financial crisis, war or other national emergencies.
Want more perspectives? Check these interactive sites for more info:
http://www.propublica.org/special/government-bailouts/ gives an excellent visual representation of this historic bailout against others, including a section on if those examples worked out not.
http://www.thetakeaway.org/archives/2008/09/17/5 gives a jazzy audio podcast of the history of bailouts that sparked most of the ideas in this article.
http://images.businessweek.com/ss/07/12/1217_bailouts/index_01.htm is Businessweek’s top-notch interactive slideshow of historic bailouts, domestically and abroad.
The 3 above, plus:
The FDIC, http://www.fdic.gov/bank/historical/history/235_258.pdf
The State Department
Gotham Center for New York City History
New York magazine