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Treasury bills briefly paid 16 percent interest.
    The second driver of change was technology. The US financial sector did need some deregulation, or more accurately, different and modernized regulation, in the computer age. The tight control
over interest rates on consumer deposits, the somewhat artificial division between banks and S&Ls, and the prohibition on interstate banking caused significant inefficiencies. Information
technology and the rise of electronic financialtransactions created opportunities for productivity gains through nationwide and global integration of previously distinct
markets.
    At the same time, however, information technology posed dangers that required tighter regulation in some areas. The advent of frictionless, instant electronic transactions introduced new
volatility and market instability. Information technology also made it easy to construct and trade increasingly complicated and opaque financial products, through increasingly complex financial
supply chains. But that same complexity also made it easier to hide things—things like risk, or fraud, or who really stood to gain and lose.
    In this context—oil shocks, recession, inflation, new technologies and financial products—much of the staid, rigid financial sector performed badly. In particular, by the early 1980s
US regulators were faced with the potential collapse of the entire S&L industry.
    The S&Ls had been destroyed by the interest-rate volatility and inflation caused by the second oil shock. Their business of collecting deposits and financing long-term, fixed-rate mortgages
assumed an environment of steady, low interest rates. By the early 1980s, depositors fled low-interest S&L accounts for money market funds. At the same time, the value of the S&Ls’
low-interest, fixed-rate mortgage loans declined sharply as a result of inflation and higher interest rates.
    The Reagan administration’s publicly stated response to the S&L problem was to make the S&L industry a star test case for deregulation. But what really happened was that
deregulatory economic ideology was used as political cover for a highly corrupt process of letting the S&Ls, and their investment bankers, run wild. What followed was a film we’ve been
watching ever since.
    Deregulatory Fiasco at the S&Ls
    HAD THE GOVERNMENT simply shut down the S&L industry, the cost to taxpayers would have been in the range of $10 billion. But the industry was
politically well connected, and was one of the first to make aggressiveuse of political campaign contributions and lobbying. Senator William Proxmire, chairman of the US
Senate Banking Committee, later called it “sheer bribery” on national television. But it worked. With bipartisan support, a supposed “rescue” bill, the Garn–St.
Germain Act, was quickly passed by the Congress and signed by Reagan.
    The real killer was the appointment of Richard Pratt, an industry lobbyist, as head of the Federal Home Loan Bank Board, the S&Ls’ regulator. Pratt proceeded to gut the regulations
against self-dealing. For the first time, an S&L could be controlled by a single shareholder, could have an unlimited number of subsidiaries in multiple businesses, and could lend to its own
subsidiaries. Loans could be made against almost any asset. S&Ls could now raise money by selling government insured certificates of deposit (CDs) through Wall Street brokers. The shakier the
S&L, the higher the interest rates paid by their CDs, and the larger the investment banking fees.
    It was a licence to steal. The people running S&Ls started to play massively with other people’s money. They loaned money to themselves, they loaned money to gigantic property
development projects that they owned, they loaned money to their relatives, they bought cars, planes, mansions, and assorted other toys.
    From 1980 through mid-1983, an operator named Charles Knapp ballooned a California S&L’s assets from $1.7 billion to $10.2 billion, and then kept