Does anyone remember the Savings and Loans crisis in the 1980s? Or is that just too far back, too distant a memory to tell us anything about the mess we are in today? For those too young, or too old to remember, the S&L crisis was a financial disaster from the 1980s. Around 1,000 savings institutions failed, costing the US taxpayer around $125 billion. Moreover, those were real Paul Volcker dollars, and not the near worthless Greenspan-inflated dollars of today.

Back in those days, each community had its own S&L, or as they were more commonly known – thrifts. They were tightly regulated; in particular, there was a ceiling on deposit interest rates. In general, these were conservative institutions, offering simple loans at fixed rates, and in general checked up on the creditworthiness of their clients.

In the late 1970, interest rates started to rise. However, the S&L balance sheets soon started to suffer. Their assets were all fixed rate loans, at low interest rates. Other institutions, particular money market funds, started to offer more attractive interest rates. Soon, depositors started to withdraw funds from the S&Ls, who had to sell off their low income assets in order to cover withdrawals. Often, the S&Ls had to discount the loans and very quickly, the S&Ls started to lose money.

Where do US financial institutions go when they start to lose money? Why, they go straight to Washington and ask the government for help. Sure enough, Carter came to the rescue, and deregulated the S&L industry. Restrictions were lifted on the types of loans that S&Ls could offer. In effect, S&Ls became like regular banks. Congress also did its part. In 1980, Congress raised the limits on deposit insurance from $40,000 to $100,000 per account.

Although the deregulation gave S&Ls many of the capabilities of banks, they were not subject to the same supervisory regime. Therefore, these poorly supervised and largely inexperienced institutions literally went mad on the real estate boom that was firing on all cylinders during the early 1980s. Many S&Ls lent far more money than was prudent, and in risky ventures which they did not understand.

Soon many of the S&Ls were in way over their head and again their balance sheets started to deteriorate. Deposit insurance did not help. Since Uncle Sam had guaranteed the deposits, this encouraged depositors to ignore the risks of putting cash into weak and failing S&Ls offering above market interest rates.

Then, denial set in. Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, the Congress and the Reagan Administration did not want to accept that there was a problem.They changed the regulatory rules so S&L's would not have to acknowledge insolvency and the regulator would not have to close them down.

However, the mess just kept on growing. Eventually, there was an avalanche of S&L customer defaults. Many S&Ls were soon forced into insolvency proceedings themselves. Then, the good old US government stepped in to clean up the mess. The U.S. government agency Federal Savings and Loan Insurance Corporation, which at the time insured S&L accounts in the same way the FDIC insures commercial bank accounts, then had to repay all the depositors whose money was lost. It was expensive. Around a quarter of S&Ls were bust, and the price tag was $125 billion.

What are the lessons of the S&L crisis? First, lax lending standards lead to big problems. Looking at today’s mess, the growth of all those liar loans and various other exotics are prime examples of poor financial sector supervision. The S&Ls failed because they did not understand the risks associated with the loans they were extending. Does that sound familiar? Putting it more simply, people who can not service loans, should not get them. Supervisors should ensure that banks remember that simple axiom.

Second, when banks mess up, they know that they can count on the government and its big fat checkbook to sort it out. Yes, a taxpayer funded bail out is on its way – make no mistake about that. All those foreclosed loans will generate banking sector losses, which in turn will send many institutions to the wall. However, deposit insurance will then kick in, and the US government will bail the sector out.

So, taxpayers are you ready to be ripped off one more time. No? thought not.