Aftermath of the Thrift Crisis: Balancing the Economy's Books

Abstract

The thrift crisis has presented the federal government with a cleanup bill of unparalleled magnitude. Estimates of the present-value cost range from $90 billion to $140 billion. Most observers acknowledge that the economic cost of the crisis already has occurred in the form of lost investment opportunities and a lower capital stock. Fewer acknowledge, however, that full payment of the cost can be made only through a reduction in private sector claims to wealth so as to match the misuse of deposits and soured loans made by thrifts. Some of that reduction has occurred through equity write-downs in businesses and thrifts, but much of the necessary reduction has yet to occur. The necessary reduction constitutes an increased tax burden. Copyright 1990 Western Economic Association International.