Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

long-term fixed interest loans. By the late 1960s thirty-year fixed interest loans had become normal, with as little as 5 percent in down payment.10 The funding was provided by depository institutions, which offered government-insured savings accounts with capped interest rates. This was the basis on which home ownership had expanded to almost 66 percent of households by the 1970s. For home owners on fixed interest, long-term mortgages, the inflation of the post–Bretton Woods era was a windfall. The real value of their loans was eaten up while their interest rates remained fixed. For the banks that lent to them it was a disaster. In an era of inflation and fluctuating interest rates, at the capped interest rates inherited from the 1950s they could not retain their depositors, let alone attract new ones. To borrow from money markets or issue bonds, they now faced the withering interest rates set by the Fed. Meanwhile, their portfolios of fixed interest mortgages were devalued as rates on new loans soared.11 By the early 1980s the vast majority of the almost four thousand savings-and-loan banks still in operation were insolvent. Given the cost of cleaning them up and the prevailing free market ideology of the Reagan era, the path of least resistance was to deregulate and lower capital standards in the hope that they could grow themselves out of trouble. The commercial banks survived this trial by fire; the savings and loans did not. More than a thousand failed. Most of the r...